NFRA clamps down on hedge funds

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 people familiar with the matter.

The National Financial Regulatory Administration 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 people 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 (HK$5.6 trillion) 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.

Chinese banks have long been distributors for financial products from insurance policies to mutual funds to earn fees, selling hundreds of billions of yuan of hedge fund products to wealthy individuals over the years and 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 but not considered licensed financial firms. However, 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.

Bloomberg