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SHANGHAI/BEIJING (Reuters) -China's securities regulators have asked some hedge fund managers to restrict short selling in its stock index futures market, two sources said, as authorities seek to stabilise sinking stocks.

The blue chip CSI300 Index plunged to near five-year lows this week, prompting fresh vows by the government to steady capital markets.

A hedge fund manager said he received calls from China's financial futures exchange, cautioning against reckless short selling, especially "naked" short selling that is not conducted for hedging purposes.

Another hedge fund source said the exchange had informally asked his firm recently not to short sell for speculative purposes.

"Shorting is profitable in a falling market," the source said. "But if you get calls from the exchange, you get the message that you should no longer short sell to make a profit."

The sources spoke on condition of anonymity.

The China Financial Futures Exchange (CFFEX) did not reply to a Reuters request for comment. Nor did the China Securities Regulatory Commission (CSRC), which oversees the exchange.

China's stock market tumbled 13% in 2023 and has extended its slide in the new year amid relentless foreign selling, a deepening property crisis and shaky economic recovery.

On Tuesday, CSRC Chairman Yi Huiman vowed to safeguard stable operation of the capital markets with full force. China's State Council, or cabinet, also pledged more forceful and effective measures to support market confidence.

The sources said regulators did not spell out specific curbs in their informal guidance, but hinted that shorting activities using stock index futures would be curbed.

Some investors were nudged to unwind their heavy short positions as soon as possible, the sources added.

The window guidance - unwritten instructions from regulators - came amid signs of a spike in shorting interest.

Futures contracts on the small-cap CSI1000 Index due in Sept 2024 tumbled on Monday by the daily maximum limit of 10%, to trade 8% below the underlying index. Turnover of the futures contracts also spiked.

Heavy stock index futures selling was partly due to risk management activities as losses on billions of dollars worth of derivatives linked to China's equity indexes forced a vicious cycle of selling in stocks and futures contracts.

LONDON/NEW YORK/HONG KONG, Jan 24 (Reuters) - Attacks in the Red Sea by Iranian-backed Houthi militants on shipping vessels have dealt global supply chains a fresh blow.

The disruption caused to shipping through the Suez Canal, the shortest sea route between Europe and Asia, have squeezed supplies in oil, grain and many other goods.

Five hedge funds shared five ideas on how to trade on the uncertainty. Their views do not represent recommendations or trading positions, which they cannot reveal for regulatory reasons.

1/ CAYLER CAPITAL

* Commodities focused hedge fund

* Size: $54 million

* Founded in 2019

* Key trade: options spread

Cayler Capital founder Brent Belote favours an options trade.

This involves selling a put option spread on December 2024 oil futures, a way of hedging bets if oil fell to a range between $60-$50 a barrel, and simultaneously buying five times as many call options which would pay off if the December contracts hit $120 in 2024.

An option bets an asset will hit a certain value, or strike price.

Belote noted that selling 100 of similar put spreads and buying 500 calls would have earned over $4 million if put on just before Russia's invasion of Ukraine.

For the trade to work, disruption in the Red Sea needs to drain supplies so much that OPEC would be unable to meet the loss, said Belote, referring to the oil-producing group.

"The primary headwind is that OPEC is sitting on a decent chunk of spare capacity through voluntary oil cuts," he said. Otherwise oil would already by above $100, he added.

2/ SVELLAND CAPITAL

* Commodities hedge fund

* Size: around $400 million

* Founded: 2016

* Key trade: Long LNG carriers

Svelland Capital director Nadia Martin Wiggen expects demand for shipping companies carrying liquefied natural gas (.LNG), opens new tab, which is turned into gas for heating and cooking, to increase long-term.

That's because of increased U.S. production and shipping, a recovery in China demand, India's booming economy, and a greater role for natural gas in the transition to renewable energy, she said.

Red Sea disruptions have pushed up LNG delivery times and the need for more vessels to deliver LNG supplies has increased.

"Despite being an increasingly polarized world, it cannot function without access to energy," said Wiggen.

3/ AUSPICE CAPITAL

* Systematic commodity quant

* Size: $1 billion

* Founded: 2006

* Key trade: long and short several commodities

As a systematic trend follower, Auspice Capital founder Tim Pickering says the fund is increasingly dependent on shorter-term strategies in the absence of clear long-term market direction.

That has meant short bets against grains commodities broadly, among the funds' many long and short positions across energies, metals and commodities.

Red Sea disruptions have pushed up the number of grain cargoes being diverted around Africa, lengthening delivery times and squeezing supplies.

"We expect commodities to tilt higher in general as we progress into 2024," said Pickering.

4/ RAIN TREE PARTNERS

* Equity long/short boutique fund

* Size: undisclosed

* Founded: 2023

* Key trade: Long China shipping and container firms

Co-founder and CEO Gengwei Lin believes Red Sea turmoil should be short-term and has not yet had a huge impact on global supply chains and suppliers.

But because short-term shipping costs have surged, Lin favors exposure to China's large shipping companies.

"China is the world's largest oil importer, it's also the world's largest goods exporter, the crisis is benefiting shipping companies," he said.

The Shanghai Containerized Freight Index, measuring non-contract rates for container shipments out of China's ports, has surged 120% since December. In contrast, the broader Chinese stock market is down almost 7% so far this month (.SSEC), opens new tab.

Lin was also positive on containers, which benefit from the re-routing of vessels.

5/ RIVERPARK FUNDS

* Strategies in equities, fixed income and venture capital

* Size: $2 billion

* Founded: 2006

* Key trade: buy companies facing supply chain issues

RiverPark portfolio manager Conrad van Tienhoven believes the attacks on vessels by Houthi militants are unlikely to last more than 12-18 months.

Given this scenario, he sees opportunities to buy consumer companies that are trading down this year on supply chain worries such as consumer goods and auto makers.

Retail brands Nike and Lululemon (LULU.O), opens new tab are down 7.5% and 6% this year, respectively.

Van Tienhoven believes both companies have excess inventory to help deal with short-term logistics issues.

He added that automaker Tesla (TSLA.O), opens new tab may also become a buying opportunity if it misses one to three production numbers in a row and shares trade down. Tesla shares are down almost 16% this month.

Tesla has said it would temporarily suspend most car production at its factory near Berlin, citing a lack of components given shifts in transport routes linked to the Red Sea disruptions.

The companies did not immediately respond to Reuters' requests for comments.

The US takes a big step to a shorter settlement cycle for securities trade this year and Europe needs to catch up

A big change is coming early this year in the way US markets operate, with a shift to a shorter settlement cycle for trades in stocks, bonds and exchange traded funds. Most US settlements will move from T+2, or two business days after the trade is agreed, to T+1.

This is very important for the future health of markets and a step long sought after by regulators, lowering trading costs and making the settlement of trades much more efficient and reliable. 

The change should roughly halve the outstanding volume of executed but not settled trades, and so make a big reduction in counterparty risk. In the longer term, it offers the opportunity to modernise and digitise the settlement processes.

The shift to T+1 will involve quite a lot of work for US market participants. Accounting systems will need to change and will need to operate more rapidly to minimise trade failures, which can be very costly to remedy.

Stock exchanges around the world have been developing their T+1 strategy in response. But European exchanges are so far less prepared for T+1 than others and they will still be operating on T+2 settlement cycles when the US move comes.

Asset managers have warned of a “major and serious risk” to European capital markets if local regulators do not follow the US lead. In general, markets that don’t offer T+1 should be expected to see declining liquidity and to lose out to any competitors who can trade the same securities with such a settlement.

This is because global portfolios are mostly managed in dollars. So switches from European equities to the US will need short-term financing of trades to cover the longer settlement cycle. Meanwhile, switches from US equities to Europe will generate short-term money balances as American trades are settled more quickly, needing placement.

In London the choice has sometimes been framed as either go with the US and T+1, or with Europe and T+2. Indeed, if London, or another European exchange, were now to go to T+1, that could be a way to pick up significant market share.

However, I suggest over time all exchanges globally are headed towards T+0. If a reduction in the settlement cycle reduces risk, then why not eliminate counterparty risk completely by moving to T+0? One issue would be that netting — the offsetting of trades — sharply reduces the need for capital to support trading. If all settlement became instantaneous, then netting would be impossible, reducing liquidity in markets.

Also, instantaneous settlement would be likely to cause a big increase in failed trades, unless market technology infrastructure was at the same time improved. But T+0 could mean same-day settlement rather than instantaneous. Netting could be at the end of the day or multiple times a day and leading to settlement at the close of trading or after each netting. I suggest T+0 will come eventually, but that may be a decade or more away.

The need to demonstrate capability to fund trades in T+0 probably dictates that systems will need to share data using distributed ledger technology, or blockchains. I am surprised so far to have seen only relatively small experiments with blockchain in settlement.

This use of technology will make a big difference to what is possible for the settlement system. As an aside, blockchain technology could also enable a big reduction in the costs of reconciliation — checking trades are verified — incurred by asset owners, asset managers, registrar and custody banks.

The term “atomic settlement” is often used among trading and technology people. The expression started in crypto, but has developed quite a specific meaning in securities. It implies settlement that is simultaneous and instantaneous. As described here, simultaneous settlement is very important and positive for the global investor. But the need for netting makes instantaneous trade settlement very unlikely. T+0 would also need substantial technology development.

Will the change to T+1 be cost justified? It’s hard to say, but like many risk reductions it is being mandated by the regulators.

T+1 has been much discussed among traders and technology people, but has not yet apparently received much attention from the top executives in most asset owners and asset managers. But this is an important shift that has both risks and opportunities. Over the next six months it will need an increased strategic focus.

A lack of new-build luxury homes in the exclusive London area is causing wealthy buyers to opt for elsewhere or rent

Mina has been trying to sell her six-storey town house on Ovington Square in Knightsbridge for more than three years. The hedge fund manager, who declined to give her surname, and her lawyer husband relocated to central London from New York state in 2007 and fell for the home’s stately salon “made for entertaining” — a former owner once entertained Pablo Picasso and the Russian ballet dancer Anna Pavlova. 

“The house is an acquired taste, and buyers seem to want more modern homes,” says Mina, who divides her time between the UK and US. She thinks her home will probably be sold to an international buyer who will “come along and gut the whole thing”.

Her property is in one of London’s most exclusive neighbourhoods, favoured by wealthy international buyers, but it is not the only one sticking on the market (at £10.95mn, through Knight Frank). Among the many that have had their prices reduced are a one-bedroom flat near Hyde Park, now available for £1.05mn, 25 per cent less than it was listed for last May; and a three-bedroom house near Harrods, which has had its price cut by £1mn since it was listed in September for £4.75mn.  

Thanks to a sharp rise in the cost of renovating, many of those homes struggling to sell need work, says Becky Fatemi of estate agents UK Sotheby’s International Realty. The Knightsbridge market is divided: “It’s turnkey or a fire sale,” she says. “Buyers who can’t find the new-build they want are looking at other areas — or renting.”

International buyers have been slower to return to Knightsbridge after the pandemic than to other areas. Last year the average property sold for 12.4 per cent below the asking price, according to LonRes, which tracks the prime central London market, where the average is -9.4 per cent. Properties in Knightsbridge also took longer to sell, on average. 

Middle Eastern buyers, a mainstay of Knightsbridge’s pre-pandemic market, only really reappeared at the end of last year, says Paul Finch of Beauchamp Estates.

Some buyers are looking to Mayfair instead, enticed by its wider choice of super-prime developments and newer private members’ clubs. Last year one of Finch’s buyers from Abu Dhabi thought they wanted Knightsbridge but couldn’t find what they were after so bought two apartments plus a staff flat in Greybrook House in Brook Street for £30.45mn. “It shows that buyers are product driven, rather than wedded to an area,” he says.

The average price per sq ft of a flat sold in 2023 in Knightsbridge, at £2,066, was 8 per cent less than its 2017-2019 average, according to LonRes, the lowest since 2013. In Mayfair it was £2,662 per sq ft in 2023, up 13.5 per cent on that pre-pandemic period and at its highest level for a decade. 

“Knightsbridge is not the ‘bullseye’ of prime central London that it used to be,” says Will Watson of agents The Buying Solution, and predicts that prices will drop more this year. “Younger families, including clients we’ve had from Saudi Arabia and Jordan, are looking to buy houses with a wider footprint in the garden squares of Notting Hill, Kensington or Holland Park.”

Foreign buyers who will only spend a handful of weeks a year in their flat tend to prefer a purpose-built modern block with a concierge and hotel-style amenities. Top among only a handful of options is The Knightsbridge Apartments (also known as “199”), a collection of flats built in 2005.

Last week, a four-bedroom flat sold in the block for 11 per cent below the asking price of £12.5mn, according to Simon Barry of the agent Harrods Estates, who adds that they didn’t sell a single house in the area last year. 

A report by Beauchamp Estates and Dataloft property consultants last year found that the number of ultra-wealthy individuals in London choosing to rent homes worth £15mn-plus far exceeded those choosing to buy them. Stamp duty and increased scrutiny into finances (such as beefed-up anti-money laundering regulations) were cited as factors.

In October, a four-bedroom flat in 199 Knightsbridge at £8,000 per week was agreed at £8,500, due to multiple applicants, according to Sarah McIntyre, head of lettings at Harrods Estates. “Most people want to be close to Harrods; schools are rarely discussed in Knightsbridge. They love 199, and also One Hans Crescent [directly behind Harrods] because of the security and the parking spaces, which are rare in Knightsbridge.”

It was after struggling to land any other property she liked during the competitive rental market of 2022 that Pippa Lowe ended up renting a studio apartment in Hans Crescent for “less than £450 a week”. But she is planning to move on. “It’s very convenient but I don’t know my neighbours; people keep themselves to themselves here,” says the lifestyle writer in her twenties.

But there’s a nice sense of community in Cadogan Square, says Audrey Foster. “They don’t allow parties in the [communal] garden but I chat with neighbours,” she says. Her two-bedroom mansion flat has been on sale since June, at £2.45mn, through Savills. “I’ve had some viewings in January,” says Foster who is relocating with her daughter to Ireland for her job in healthcare. 

Rachel Vosper, who rents a two-bedroom house with her daughter near her eponymous candle shop, says her street on the Belgravia borders is also very neighbourly — but the area has changed. “I’ve been here 13 years, and it has lost its buzz since Covid. I blame the working from home culture and the end of tax-free shopping [for non-EU visitors] for the drop in people coming to the pubs and the shops. There is definitely more tumbleweed.”