Data from Hedge Fund Research point to sharp losses through July for hedge funds invested in China, with the HFRI China Index down 7.7% through the month.
The Shanghai Composite Index fell over 14% through the month, including a one day decline of 8.5%.
The impact included a contraction of some $10bn in the total capital invested in Asian hedge funds. This came after the sector hit a record high of $126.3bn in total capital invested in the first quarter of 2015.
Net inflows to Asian hedge funds reached $1.74bn in the quarter, the highest inflow since the first quarter of 2014. Equity Hedge strategies received the bulk of these net flows, some $1.48bn through the period.
It is not just asset price changes that have affected hedge funds invested mainly in China. Policymakers there have also moved to restrict short selling and use of leverage. The funds are also facing a challenge from the establishment of National Team Funds, set up by the Chinese government to provide liquidity to Chinese equity markets, HFR said.
Kenneth Heinz, president of HFR, said: “Chinese financial markets have come under intense pressure, encompassing not only directional losses, but also liquidity, structural and political pressure, as Chinese equities have posted the sharpest declines since 2007.”
“While this challenging, fluid environment has resulted in mark-to-market losses as many retail investors are forced to liquidate positions, recent developments have created opportunities for long-term, sophisticated strategies and investors. While it is likely that this regional financial turmoil will continue through year-end, creating complex and unpredictable outcomes, hedge fund strategies which reduce and minimize direct equity market beta represent an important tactical opportunity for global investors to participate from exposure to many of these trends while reducing unwanted strategic and structural risks.”