CHINESE regulators are considering tougher restrictions on how banks sell financial products to the public, in a move that could cut off a major distribution channel for some of the nation’s largest hedge funds, according to sources familiar with the matter.
The National Financial Regulatory Administration (NFRA) is seeking feedback from commercial banks on revisions that would ban “disguised” selling of so-called private fund products, a category that includes hedge funds, the sources said, asking not to be identified as the consultations are private. Banks have for years been one of the key distributors of hedge funds, which typically raise money from investors in the form of trust products that is then invested into their funds.
The revised bank distribution regulations, if enacted, would add to challenges in the 5.2 trillion yuan (S$971 billion) hedge fund industry, which is already under pressure from a much higher asset threshold and other restrictions in new rules set to take effect in August. Financial regulators are stepping up efforts to weed out the weaker and less compliant investment firms after more irregularities alarmed investors in recent years.
The NFRA did not respond to a request for comment.
Chinese banks, with 220,000 outlets nationwide, have long been distributors for financial products from insurance policies to mutual funds to earn fees. They have been selling hundreds of billions of yuan of hedge fund products to wealthy individuals over the years, diversifying offerings to private banking clients.
Under rules in 2016, banks can only distribute products for licensed financial institutions. Private funds, which include hedge funds, are registered with the Asset Management Association of China (Amac) but are not considered licensed financial firms.
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Yet banks continued to serve them – typically by selling products for trust firms which then tapped hedge funds as investment advisors and allocated money to them.
China’s hedge funds oversaw 704 billion yuan in management advisory products at the end of 2021, with 75 per cent of such assets run in the form of trust products, according to Amac data. Such products fell to 574 billion yuan at the end of 2022, about 10 per cent of the industry total.
The latest revisions came after the State Council said last year private funds shouldn’t tap external distributors to raise money unless regulators stated otherwise.
Banks often limit hedge fund products to those managed by the bigger, more established players to control risks. Global giants including Bridgewater Associates have been using that channel to raise money for onshore offerings. BLOOMBERG
