(Bloomberg) — An alleged fraud in China that ensnared financial firms including a major hedge fund has set off alarms across the industry, with investment managers, regulators and brokerages racing to improve risk monitoring.
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The matter concerns the investment of about 1 billion yuan ($139 million) in products that were issued by Chinasoft New Momentum Asset Management Co. but managed by other hedge funds. In response to local reports of the suspected scam, the company said last month that some of the products faced “repayment difficulties” due to a breach of contract by the underlying manager, Shenzhen Huisheng.
China’s securities regulator said last month that it’s investigating whether Shenzhen Huisheng and other private funds engaged in wrongdoing such as reporting false information, vowing to strictly deal with any violations of the law.
Use of the multi-layered investment structure, which is set to be banned under proposed rules released in April, has raised questions in China’s 6 trillion yuan hedge fund industry over the level of due diligence by money managers and asset custodians. It also underscores why officials are seeking to tighten regulation…
