Shanghai free-trade zone

In another bid to make Shanghai a stronger financial center, the city is trying to establish a beachhead for China’s fledgling hedge-fund industry.

The northern district of Hongkou plans to draw in several dozen hedge funds to set up offices by the end of next year. The firms, most of them local, will get “pretty generous” tax, rent and other incentives to establish themselves in what will be Shanghai’s “hedge-fund park,” said Kenny Li, CEO of asset manager KKM Capital, which is helping the government set up resources for the funds. The first offices will be in the 47-story Citic Plaza building, although the plan is to expand into the surrounding neighborhood as more hedge funds join, added Mr. Li.

Shanghais Hongkou district, already the site of Hongkou Stadium—home field for the Shanghai Shenhua Football Club—aims to be the citys hedge-fund neighborhood as well. Agence France-Presse/Getty Images

Shanghai has taken a number of steps to draw in hedge funds, including foreign firms. Under a trial program allowing foreign hedge-fund managers to raise yuan on the mainland for investments abroad, six firms won the right to raise up to $50 million each in yuan: Man Group PLC, Winton Capital Management, Oak Tree, Citadel, Och-Ziff Capital Management Group LLC and Canyon Partners. On a broader scale, the city will be testing interest-rate liberalization and yuan convertibility in its newly established free-trade zone. The zone is expected to make headway in market innovations such as commodities trading, another area that could benefit hedge funds wanting more flexibility in their trading strategies.

The Hongkou project isn’t targeting foreign hedge funds but will welcome them, said Mr. Li. The district government plans to buy stakes in a number of the hedge funds, he added, declining to disclose how much Hongkou plans to invest.

“The idea is for Hongkou to become like Mayfair in London, or midtown in New York,” both outside the main financial districts but home to clusters of hedge funds and investment firms, said Bartt C. Kellerman, organizer of “Battle of the Quants,” a conference for global hedge-fund managers that will kick off in Hongkou’s new hedge-fund zone this November.

Lujiazui, the district east of the Huangpu River that divides Shanghai, is considered the city’s financial hub. Its glitzy skyscrapers include the Shanghai tower, which will be the tallest building in China when completed. Hongkou has lagged behind in development, although it is home to some of Shanghai’s most famous prewar hotels and buildings. In the early part of the 20 th century, during the Japanese occupation, it was home to a ghetto neighborhood for Jewish refugees.