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This article conducts the very first empirical study exploring the contractual arrangements of Chinese hedge funds, which are organized not as limited partnerships but as trusts. Using 139 trust contracts collected by hand, this article sheds light on the structure, covenants, and compensation mechanisms used by “sunshine funds,” the local name for hedge funds in China. It shows that, while sunshine funds do have similar contractual arrangements as typical LP-organized hedge funds, they also possess many undeniable differences due to the jurisdiction-specific characteristics of China. In particular, because of the direct involvement of trust companies, sunshine funds include certain covenants and terms that could both narrow the decision-making power and dampen the incentives of investment advisers. New, but rapidly developing, sunshine funds have been frequently targeted by regulatory efforts, which, however, come at a low level of consistency and sometimes lack in-depth consideration. Growing out of gray regulatory areas, Chinese sunshine fund managers have demonstrated remarkable competence in positioning themselves by taking advantage of favorable regulations and mitigating the impact of unfavorable ones. Looking ahead, it is of key importance that a proper balance is reached in terms of what role regulators should play in dealing with the Chinese hedge fund industry.

Money Under Sunshine: An Empirical Study of Trust Contracts of Chinese Hedge Funds