There are factors working in Liu's favor. For one, there seems to be a sense among Chinese regulators that hedge funds make markets more efficient by eliminating inefficiencies and pulling skewed prices in the right direction. Interestingly, state media has increasingly echoed this viewpoint.

    Further, China's recent currency easing means that investors will be more keen to convert stockpiles of Hong Kong dollars to RMB, since the Hong Kong dollar is linked to the U.S. dollar, against which many analysts think the RMB will gradually gain value. China is the world's top IPO market this year, which doesn't hurt either. Most importantly, there's still a tremendous amount of money sitting on the sidelines in China, and investors, although wary about their losses in 2008, are searching for new opportunities.

    This puts a lot of pressure on the pioneers. If there are a few high-profile hedge fund blow-ups in the press, Mearns says, it could frighten potential investors for years to come. Of course, it could go the other way. "China is really status conscious," says Melyn Teo, a hedge fund expert at Singapore Management University. "If you see a lot of rich, wealthy individuals start investing in hedge funds, everyone else might pour money into them."