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US investors are increasingly asking Asian fund managers to carve out special vehicles so they can invest in the region without falling foul of American investment restrictions on Chinese technology.
American investors held $361bn of Chinese stocks and bonds as recently as the end of 2024, according to the US Treasury, but rules introduced last year threaten large fines and imprisonment for those invested in certain high-tech Chinese sectors, such as advanced semiconductors, quantum computing and artificial intelligence.
Several US states have also brought in laws to restrict their public pension funds from investing in Chinese companies.
The restrictions are in response to a growing AI arms race between the US and China and concern within Washington that American investors are helping Beijing develop cutting-edge technologies.
While asset managers have previously received interest in “ex-China” funds, private equity and hedge fund managers in Singapore and Hong Kong now report demand from US institutional investors for so-called parallel funds. These are replicas of existing funds that exclude certain Chinese sectors. In the past 12 months, an increasing number of asset managers were offering the workarounds in response to investor requests, they said.
“US investors have become highly sensitive to China risk,” said Kher Sheng Lee, co-head of Asia-Pacific at the Alternative Investment Managers Association, which represents more than 2,000 hedge fund managers globally, with combined assets of over $4.5tn. “They still want the Asian growth story but now demand structures that limit spillover.”
“Momentum is building,” he added. “Managers are repurposing familiar fund tools, like side pockets originally built for illiquidity, to manage geopolitical friction.”
Side pockets are typically set up for clients who want to strip out harder-to-sell assets from a fund’s portfolio and increase their liquidity. Now US investors specify Chinese companies and sectors they want excluded.
“These requests from US investors are coming up more and more often, especially for areas like semiconductors,” said a Singapore-based manager of a tech-focused fund. “They are looking to take out their exposure to the most sensitive companies.”
Lee added: “The red lines are sharpening: advanced chips, AI and quantum are out. National security considerations are now a core investment filter.”
Asset managers said the requests were driven by compliance staff at the US investors, which included pension funds, endowments and family offices, rather than the investment teams.
“US regulation is the biggest driver of this,” said one Asia-based adviser who has worked on deals in which private equity firms have allowed US pension funds to exclude certain Chinese companies.
“The most common solution has been for the manager to set up two separate funds,” the person added. “One that will have exposure to the entire regional strategy and another that will have exposure to the entire region but excluding the relevant country.”
Under rules drawn up under former president Joe Biden, Washington in 2025 imposed civil and criminal penalties on US entities that invested in Chinese companies involved in semiconductors, quantum computing or AI systems that could be used by China’s military.
The civil and criminal penalties include fines of up to $1mn and prison terms of up to 20 years.
This led to many US investors cutting back or pausing new investments in China, while several Silicon Valley venture capital firms pre-emptively separated their Chinese entities before the rules came into effect.
Since then, President Donald Trump has signed into law more significant powers to restrict US investments in Chinese technology companies, which has further led to investors seeking workarounds.
Last year Minnesota’s State Board of Investment, which manages public retirement funds, said it had secured an opt-out from a Blackstone Asia fund from any investments in China, according to public documents, which said Blackstone had offered other investors the same option.
Blackstone declined to comment on the matter or on how the deal was structured.
The US state of Arkansas last year introduced a law to ban public pension funds from investing in Chinese companies, while states including Indiana, Florida, Kansas, Iowa, Tennessee and Arizona have passed legislation to restrict investment in specific Chinese sectors such as AI.