A top-performing Chinese hedge-fund manager suspected to have colluded with another domestic investment firm to buy and sell shares is said to be at large in the US.

Mainland media report that Zhang Chao’s Shanghai firm, Purple Stone Investment, has been investigated by the China Securities Regulatory Commission (CSRC) since last year. Zhang left for the US several months ago, reported China Business News (CBN) last week.

A Shanghai-based hedge fund manager says: “He is under investigation, but the results have not been announced yet. This has been talked about in the industry since mid-June.”

Zhang is suspected to have been colluding with a portfolio manager at Huafu Fund Management, as their trading patterns of several A-share stocks have been “surprisingly similar”, reports CBN. Huafu denies it is under investigation by the CSRC. 

Purple Stone and Huafu both run funds that became top-10 free-float shareholders of East China Science and Technology in late 2011, and both disappeared from the top-10 list in the first quarter of this year.

In the fourth quarter of last year, both funds bought a substantial amount of Lonkey Industrial Co Guangzhou to become the second- and third-largest free-float shareholders of the stock.

And in the first quarter of 2012, both subscribed to the IPO of Shantou Dongfeng Printing Co and became the fourth and first largest free-float shareholders.

Zhang, Purple Stone’s chairman, achieved a 36% return last year for his first fund, which ranked it top among structured-trust hedge-fund products in China in 2011. Yet two subsequent funds launched in the second half of last year suffered losses of 25.41% (from June 29, 2011 to June 22, 2012) and 29.35% (from September 1, 2011 to June 29, 2012).

Last Tuesday (July 3), Purple Stone released a letter to investors denying local media reports and saying the company “has been operating normally, and the research and investment team is stable”.

Meanwhile, the marketing director of Purple Stone has told local media that the firm has received inquiries from the CSRC that are more like a routine review. He added that Zhang is now on a “study tour” in the US with other senior managers, without specifying when they are likely to return.

But sources say hedge-fund investment advisory firms that launch products on trust platforms are not under the direct supervision of CSRC, and it is not among the regulator's duties to “routinely” check on hedge funds.

“If there is nothing suspicious, the CSRC will not check with the hedge fund manager,” says a manager at a trust company in Shenzhen who works closely with local hedge funds. “It is obvious that Purple Stone is playing down the investigation.” 

Supervision of hedge funds in China is still weak compared to mutual funds, largely due to various legal issues to be clarified, notes Howbuy, a Shanghai-based consulting firm. Strictly speaking, the CSRC does not regulate hedge funds, although it does look into insider-trading activities carried out by market participants.

When a long-expected new fund law is passed, hedge funds will be formally regulated. “This will have a meaningful impact on the hedge-fund industry and will benefit its long-term development and innovation,” says Howbuy.

The CSRC declined to comment for this article.