An alleged fraud in China that saw financial firms including a major hedge fund at its epicentre  has cautioned the industry, with investment managers, regulators and brokerages racing to improve risk monitoring, according to a report by Bloomberg. 

The report notes that the matter, which has attracted little attention outside China, involves funds being passed through several layers of managers, according to local news reports. New Momentum, which oversees more than CY10bn, invested about CY1bn with Shenzhen Huisheng, which then invested with another peer called Hangzhou Yuyao instead of managing the money itself.

A similar situation allegedly involving Hangzhou Yuyao has also afflicted investors in a trust firm. Two listed companies said their investments totalling CY420m into Hangzhou Yuyao through Guotong Trust Co., are facing losses, the report said.

Since, the China Securities Regulatory Commission released draft rules on Dec. 8 expanding mandatory custodian requirements to all contractual funds, products that mainly invest in single assets, overseas assets and over-the-counter derivatives, and those that use leverage