Prime Capital Management Co, the Hong Kong-based hedge fund, is scaling back its wager on 500.com Ltd, which analysts said underlined its concern about the online bookmaker's viability.

The fund has cut its stake in the Shenzhen, China-based company to $27 million as of Oct 29, from about $93 million a week earlier, regulatory filings show.?

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Prime Capital now controls less than 5 percent of 500.com's United States-traded shares, after previously being the largest stakeholder at 16 percent.

Investors are now questioning the long-term potential of the sports-lottery service provider's operations and the legitimacy of its licenses with the Chinese government.

Carson Block, known for successfully betting against Chinese stocks, said in September his Muddy Waters LLC had a "modest short" position on the company due to "fundamental issues, red flags and potential risk of wrongdoing". 500.com has refuted claims it's misled investors.

"The company is tiptoeing along a fine line and, at any point, the Chinese government could make radical changes that could either hurt or help this company," said Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC in Bedford Hills, New York, on Monday. "I call it a very high risk investment."

Prime Capital has more than $3 billion in assets and has returned almost 26 percent annually over the past decade wagering on Chinese companies, the Financial Times reported in February.

The hedge fund owns the stake through its Dragon Billion China Master Fund and two other managed accounts, according to a Securities and Exchange Commission filing.

Hedge funds are largely unregulated pools of capital that can bet on falling as well as rising asset prices.

Linda Bergkamp, an external spokeswoman for 500.com, declined to comment on Prime Capital's stake.

Block of Muddy Waters declined to comment on whether he's still shorting the stock.

500.com debuted in New York less than a year ago offering investors a chance to bet on the growing disposable income of China's burgeoning middle class. The company, founded in 2001, lets customers buy tickets for government-authorized lotteries and bet on sports events through its website.

In May, the Jinghua Times reported that China's Sports Lottery Administration Center had not authorized any sports gambling websites and that online lottery sales are illegal without authorization. "The company reiterates that it has obtained all relevant approvals to legitimately operate an online sports lottery service in China," 500.com said in a May 8 filing.

Active users surged by 121 percent in the second quarter from three months earlier to 2.5 million, 500.com reported in August. Net revenue almost tripled to 156 million yuan ($25.2 million) from a year earlier. The company is expected to report third-quarter earnings later this month.