Forced sales put pressure on the stock market

Beijing China’s nearly $1 trillion hedge fund industry is threatening to add to China’s stock market turmoil. The reason: she had to accept increasing portfolio losses, which in turn forced her to reduce stock holdings.

Last month, around 2,350 stock-related hedge funds fell below a threshold, which usually activates clauses obliging them to make forced sales, according to data from industry watcher China Merchants Securities Co. Many were therefore heading for a level that requires liquidation. Signs of stress were “near historic highs,” the industry watchdog noted in its analysis this month.

Selling rules were introduced in China to protect hedge fund investors from excessive losses. However, in a falling market, they can exacerbate the situation further.