Contents lists available at ScienceDirect Pacific-Basin Finance Journal journal homepage: www.elsevier.com/locate/pacfin Thriving in a disrupted market: a study of Chinese hedge fund performance ☆ Ying Sophie Huang a , Juan Yao b, ⁎ , Yu Zhu c a School of Management, Zhejiang University, China b Business School, University of Sydney, Australia c School of Economics, Zhejiang University, China ARTICLE INFO JEL classifications: G15 G18 G20 Keywords: Chinese hedge funds Fund performance Short sale restrictions ABSTRACT We study a group of newly-emerged hedge funds in China, focusing on their performance and growth under a series of recent regulatory changes. These include the implementation of short sale restrictions and a circuit breaker. We find that the funds in our sample generally out- performed the stock market despite these regulatory disruptions. The best-performing equity- related strategies were long-short and multiple strategies. Our results indicate that the ability to sell short is important for all funds adopting equity-related strategies other than the long strategy. The imposition of short sale restrictions significantly reduced hedge fund performance, and the performance differential between “winner” and “loser” funds converged over time. The evidence suggests that the regulatory changes have greatly affected the hedge fund industry in China. 1. Introduction The private investment fund industry in China has seen massive growth over the past ten years. “Hedge-fund-like” financial products have thrived and their growth has been fueled by increasing demand from high net worth individuals seeking alternative investment strategies. While it is not surprising that many Chinese investors have switched to privately-managed funds instead of self- managed speculation on roller coaster-like stock markets, the risk-return trade-offs of hedge fund investments remain mysterious. The Chinese financial market is far from being mature. Consequently, China's new hedge fund professionals must learn to deal with some unique challenges, such as unpredictable regulatory changes and trading tool limitations. One of the most distinctive skills of hedge fund managers involves taking advantage of leverage and selling short so that they can trade against market trends and achieve profit even when the market is in extremely negative states. In an effort to further develop the financial market, in 2010, the Chinese Government permitted margin trading and the trading of futures contracts on the CSI 300 index. In 2013, the trading of government bond futures was resumed. All these measures literally provided fund managers with the possibility to sell short. These regulatory changes led to a surge in borrowing for the purpose of stock trading, and short-selling became a popular investing strategy. On the other hand, it is recognized that unconstrained short-selling and excessive leverage may also put financial institutions and the financial market at greater risk, which in turn may hinder further financial reform. Following a massive market plunge in June 2015, the Chinese regulator attempted to dampen market turbulence by placing stringent restrictions https://doi.org/10.1016/j.pacfin.2018.02.005 Received 16 August 2017; Received in revised form 13 February 2018; Accepted 14 February 2018 ☆ Ying Sophie Huang is grateful to acknowledge the financial support from the National Natural Science Foundation of China (Grant No.71573228). The usual disclaimer applies. ⁎ Corresponding author at: Finance Discipline, Business School, University of Sydney, Australia. E-mail address: juan.yao@sydney.edu.au (J. Yao). Pacific-Basin Finance Journal 48 (2018) 210–223 Available online 21 February 2018 0927-538X/ © 2018 Elsevier B.V. All rights reserved. T