For Hedge Funds, Shorting China Is Easier Said Than Done

Q1 of 2016 was the worst quarter for hedge funds in at least seven years, but hedge funds dedicated to the Chinese market are having a particularly tough go of it.

According to Bloomberg’s Christopher Langner, shorting stocks in China can be a difficult proposition these days. Shorting mainland China stocks has become extremely limited and expensive. In the United States, that problem could be easily remedied by turning to the derivatives and futures markets, but there is no options market for individual Chinese stocks and only one index-option contract available. Futures are very limited as well.

Chinese regulators aren’t doing hedge funds any favors either. Last August, a new rule was implemented in China requiring short sellers to wait 24 hours to cover their positions. In addition, Beijing has also made new rules limiting the trading of stock-index futures.

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With very few viable ways to go short Chinese stocks, Chinese hedge funds are finding it difficult to hedge.

To make matters worse, competition among Chinese hedge funds has skyrocketed in recent years. “There’s a lot of rich people in Asia’s largest economy and over the past five years, the number of companies being established to manage that wealth has soared,” Langner wrote.

So far this year, the iShares FTSE/Xinhua China 25 Index (ETF) FXI is down 1.7 percent while the SPDR S&P 500 ETF Trust SPY is up 3.8 percent.

Disclosure: The author holds no position in the stocks mentioned.