SHANGHAI China's hedge fund industry took a small but significant step on Monday as Guotai Junan Securities Co readies a $45 million (28 million pound) hedge fund, the first such product approved by securities regulators.
The move, if successful, could spur other brokerages, fund managers and even trust firms to follow suit, sowing the seeds for China's own George Soros or James Simons.
The maiden hedge fund, to be managed by Guotai Junan's asset management unit, planned to raise 300 million yuan initially and would use index futures to mitigate systematic market risks, President Zhang Biao told Reuters in an interview.
Although many privately-run Chinese fund managers with no licenses call themselves hedge funds, with some also using derivatives to hedge risks, none of them have been approved by regulators.
China launched index futures and allowed short selling for the first time last year, enabling investors to profit from falls in stock prices and paving the way for the emergence of hedge funds, which typically use derivatives to hedge investment risks.
However, Chinese regulators have been cautious about approving hedge funds, partly because of the apparent negative role they played in the financial crisis.
The launch of Guotai Junan's hedge fund comes at a volatile time for China's stock market, with investors worries about inflation, monetary tightening and a possible slowdown in economic growth.
Meanwhile, the authorities stepped up a crackdown on the real estate market, leaving investors balking at buying property.
"There's huge demand for hedge funds in China, with the market awash with cash seeking modest, but stable returns," Zhang said, adding that the product targeted wealthy individuals with a subscription threshold of 2 million yuan.
Zhang, who aspires to become China's James Simons, the well known fund manager at Renaissance Technologies, said the fund would adopt a so-called market-neutral strategy, aiming to maintain a close balance between long and short positions.
Targeting an annual return of 10-15 percent for its first hedge fund, Guotai Junan planned to launch identical funds later to raise up to 5 billion yuan, he said.
Zhang brushed aside concern that hedge funds could play a destabilising role in China's stock market, saying: "The door is just open. Hedge funds in China are rabbits and sheep now, not wolves and tigers.
(Additional reporting by David Lin; Editing by Chris Lewis)