Volatile China market conditions early this month provided hedge funds with profitable short-selling opportunities, although long portfolios were subject to daily price swings, according to Yongshan Duanmu, managing director at China-focused Pinpoint Asset Management.

“This is the most extreme market volatility that I’ve ever seen, including 2008. Clearly we didn’t see that kind of volatility. We had no crystal ball,” says Duanmu.

He adds that Pinpoint, which runs four hedge funds, has been holding “a lot of cash on hand” and since the beginning of the year has had “relatively low to moderate exposure” to the market, which has helped it to weather the market conditions.

China stocks have endured a bear market which saw the Shanghai Composite Index fall to a low on August 8 representing a 20% drop from a November 2010 high. While some observers believe the market has bottomed out, the index has spent most of the month swinging between gains and losses.

Pinpoint, which invests in listed Chinese companies via A-shares, B-shares, H-shares and American depository receipts, saw short-selling opportunities amid the rout, says Duanmu. “We took some profit as the stocks went down."

The firm runs a $600 million flagship Pinpoint China Fund, which is a long/short equity strategy, in addition to an Asia ex-Japan multi-strategy fund and global commodity futures fund.

The combined AUM of the four funds is about $750 million, up from about $570 million last year, thanks to recent allocations by institutional investors in the US, Europe and Asia, says Duanmu. He adds that the firm, which has offices in Hong Kong and Shanghai, hopes to reach total AUM of $1 billion by next year.

Pinpoint is exploring the possibility of launching a Ucits-compliant fund to gain greater access to European investors, adds Duanmu. “There have been very few [launches] of single-country China hedge funds in the Ucits wrapper. We look at that as a window of opportunity.”

While a second severe China market rout appears unlikely this year, “we are seeing signs of an economic growth slowdown”, notes Duanmu. “GDP growth projections have been scaled down.”

Despite the deceleration, “we think this is a good opportunity to pick stocks on the long side and also on the short side” as China’s market dynamics change. “Some industries may stagnate...but other sectors will do very well."