But the growth trend remains. Preqin said the 117 funds is double that of 2014.
"With the introduction of shortselling of China equity markets and favorable regulation being released over recent years, Preqin expects to see the number of funds launching within China continue to increase in the coming years," Ross Ford, head of hedge funds and real assets research at Preqin, said in an email to CNBC.
Interest in securities investing is also high. Of more than 15,000 investment products launched last year, 80 percent focused on fixed income or equity, according to Z-Ben.
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A major factor in the growth of China's funds this year is the strong performance in some of the local markets. The Hang Seng is up 28 percent this year and China's CSI 300 is up 21 percent.
Funds are capturing those gains. The HFRI Emerging Markets: China index is up 28 percent this year through October, the best performer among the HFRI indexes and more than twice the HFRI Equity Hedge (Total) Index's nearly 11 percent gain.
"Most Chinese hedge funds are focusing on the unique trading opportunities in mainland markets," Ken Heinz, president of HFR, said in an email to CNBC. However, Heinz said some funds were looking for overseas arbitrage opportunities.
The next step for many Chinese funds is expanding into foreign markets, several analysts said.
The industry is still in the early stages of expanding overseas, "but private funds in China are on the precipice of moving into global investment on behalf of their clients," Grinderslev said.
Historically, more than two-thirds of China-based funds focused on the Greater China region. But Preqin's Ford said 79 percent of new China-based fund launches in 2016 had a global focus.
Some funds are also trying to emulate their Western peers. Hedge fund giant Bridgewater Associates is planning to launch a version of its All Weather fund in China. A "Congrong Allweather Fund" from Shanghai Congrong Investment Management already exists. It rose 37 percent in roughly the first 10 months of the year, according to Z-Ben.