Aaron Boesky, a hedge fund manager in Hong Kong, said he would petition regulators in China to let more overseas funds invest in mainland Chinese stock markets, which have grown by more than $400 billion this year.

Most hedge funds are barred from mainland stock markets by a rule that they need more than $5 billion of assets to apply for an investment quota in the country, Boesky said. That means they are missing an opportunity to search for hidden gems among the 1,400 mainland-listed stocks or to profit from market inefficiencies, he said.

"The role falls on us to step forward," said Boesky, who set up Marco Polo Investments Group in 2004 to invest solely in the mainland. He said he aims to induce 20 other hedge funds to sign the petition.

The Communist Party has delivered average economic growth of about 10 percent a year on the mainland by pushing market-oriented policies and widening access for overseas investors. Failure to include hedge funds among institutions so far granted $8.65 billion of quotas to buy shares may hamper development of mainland capital markets, said Vincent Duhamel, head of asset management in Asia outside Japan at Goldman Sachs Group.

"It's new products, new ideas and new ways of doing things, which will probably cheapen the cost of capital in general and make it more efficient," Duhamel said. "Market innovations don't come from regulators."

Goldman Sachs is the biggest hedge fund manager in the world with $29.5 billion of assets. The firm has a $200 million quota for its asset management unit to invest in Class A, yuan-denominated shares and a $300 million allotment that can be loaned to clients for a fee.

Without a quota granted under the Chinese government's Qualified Foreign Institutional Investor program, investors cannot directly buy A shares. Only foreign-currency B shares and stocks of Chinese companies listed outside the mainland are available.

Holders of the quotas typically charge 2 percent when they lend shares to brokerage clients, compared with a fee of less than 0.5 percent in Hong Kong for buying and selling shares.

The $5 billion requirement is "onerous," said Boesky, who oversees $40 million of A shares. "Any hedge funds with more than $30 million under management should be able to apply."

The value of A shares in the Shanghai and Shenzhen stock markets has more than doubled to $890 billion this year. While regulators signaled in July last year that they planned to double the quotas to $10 billion, they have yet to achieve that target.

That level of foreign ownership in the stock market of the world's fourth- largest economy is a "joke," Boesky said. "The demand is so tight that people are fighting with their fists almost to get it."

So far, 52 overseas institutions, led by UBS, have received quotas from the program, known as QFII.

"One of the biggest challenges that hedge funds face is the QFII issue — the size of QFII and how it's allocated," said Kirby Daley, who introduces hedge funds to investors at Société Générale's Fimat unit in Hong Kong. "Until that's rectified, it will restrain growth."

No hedge funds, including large ones that meet the asset requirement like Bridgewater Associates and Citadel Investment Group, have been allotted quotas.

Even after borrowing quota from the original holders, they are restrained in their strategies. China does not allow stock borrowing or margin trading and does not offer equity derivatives, aside from about 20 warrants. It has yet to roll out details on short-selling, where investors sell borrowed stock hoping to buy it back at a lower price.

"The concern of China's authorities now is speculation," said Richard Ernesti, international sales head of global securities and funds services at Citigroup. 'They don't want flight capital, they want committed capital."

Hedge funds, which typically use more leverage and derivatives to seek returns whether the market rises or falls, are more nimble in buying and selling stocks than mutual funds.

"They are more of a short-term play and have less attachment to companies," said Tat Auyeung, a fund manager at Apex Capital Management in Hong Kong. Their swiftness in making trades allows them to act as policemen for corporate governance issues and direct capital to good companies, he said.

"There's a lot of misconception about hedge funds," said Ba Shusong, deputy director general of the development research center of the State Council, the Chinese cabinet. The government should respect the market and lay out sensible regulation, he added.