Quantitative hedge funds have been hit with margin calls due to the sharp rise in Chinese stocks, and hedge funds with short positions have been hurt.
Hedge funds that use short selling as part of a market-neutral strategy are now at risk of having their positions liquidated, Bloomberg reported, citing people familiar with the matter.
The Chinese government announced last week that it would allow institutional investors to use central bank loans to buy stocks.
Officials said they would consider creating a market stabilization fund, starting with an initial capital of 800 billion yuan ($113 billion) to be injected into the stock market.
Since the news was announced, the Hang Seng Index (HSI), which comprises 82 blue-chip companies from China and Hong Kong, has risen non-stop, erasing two years and eight months worth of losses in less than two weeks.
The CSI300 index, which comprises China’s 300 largest companies, has risen nearly 30% since the news.
Liang Bin Asset Management, which manages about 3 billion yuan ($428 million), said a confluence of events, including a “rare technical liquidity depletion”, had caused the turmoil at the company. In a letter to investors obtained by Bloomberg, the hedge fund told investors that the margin call was the “last straw in the camel’s mouth.”
The company said the liquidation of short sellers fueled the rally as brokerages closed out their positions, adding further upward pressure to an already hot market.
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