FOR INDUS CAPITAL PARTNERS, 2013 COULD BE THE year of the hedge fund in mainland China. General counsel and partner Brian Guzman and his colleagues at New York–based private investment fund adviser Indus, which was spun out of legendary hedge fund manager George Soros’ firm more than a decade ago, have been eyeing the Chinese market for some time. With regulators poised to allow foreign hedge funds to set up shop in the country’s second-largest city, they’re optimistic.

Indus, which runs long-short strategies, plans to apply to the proposed qualified domestic limited partner (QDLP) program in early 2013. Under QDLP non-Chinese hedge funds would be able to establish marketing offices in Shanghai and gather assets from its institutional and high-net-worth investors. “These are tentative steps to open up to global investors,” says Guzman, whose firm opened a Hong Kong office in 2000 and manages $4 billion, roughly half of it in Greater China equities. “Our hope,” he adds, “is that regulators look at our industry with rational sense and see that firms such as ours are low-risk, low-volatility, long-term investors who add a lot to the markets in general, but specifically liquidity, efficiency and price discovery, which can ultimately reduce volatility.”

The Shanghai Municipal Financial Service Office is expected to formally launch the QDLP pilot program in the next few months by granting its first licenses, says Hubert Tse, a partner at Shanghai-based law firm Boss & Young whose clients include several managers on the waiting list. The quota for renminbi to foreign currency conversion hasn’t been announced, but  Tse predicts it will rise after a few global alternative asset managers win approval and QDLP proves a success. A handful of firms, including Blackstone Group, Man Group and Millennium Management, have expressed interest, says Aradhna Dayal, head of Asia at research firm HedgeFund Intelligence.

Both sides have something to gain. Local and global hedge funds have long been active in Hong Kong, but mainland regulators legalized a domestic industry just two years ago. The latest careful move toward liberalization, QDLP suggests that Chinese authorities recognize hedge funds’ value and are serious about making Shanghai an international financial center by 2020. For foreign firms the program provides access to Chinese investors and a beachhead in the second-biggest equity market after the U.S. If China allowed widespread margin trading, it could be the world’s largest and most liquid market in less than a decade, Tse says. “It is not surprising that global hedge funds are positioning themselves to tap this opportunity,” he notes.