DMA-Swaps help China’s hedge funds boost returns

Fang • submitted 2023-11-22 08:52:20

The DMA-Swap strategy, an increasingly popular leverage and derivative strategy that helps Chinese hedge fund managers to skirt regulatory borrowing limits by having trades sit on brokers’ books, is allowing some funds to generate big returns in the country’s ailing stock markets, according to a report by Bloomberg.

The report cites unnamed sources as saying that the strategy is being employed to generate returns in excess of 150% in some cases, while the domestic stock market is down around 4% YTD. The subsequent social media outcry has prompted regulators to probe brokerages for data around Direct Market Access (DMA).

In a typical DMA-Swap deal, long-short equity hedge funds buy shares and sell stock index futures with borrowed money through DMA, which gives them access to the electronic facilities of financial market exchanges. The swap, which sees funds make gains from the trade, and brokers earn interest, sits on the books of brokerages.

The funds can borrow up to $4 against just $1 of margin which makes the practice potentially problematic if the bets backfire, according to analysts, and poses a risk to market stability.

DMA-Swaps qualify as proprietary trades for brokers and fall outside of the normal rules restricting fund borrowing to a maximum of $2 to every $1 of margin.

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author: Fang

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