It is possible for hedge funds to be a combination of strategies, but the majority will be either quantitative or fundamental. Whereas decisions relating to a standard hedge fund are based on discretionary decision making, the decisions within a quantitative hedge fund will follow a strategy that is devised using complex analytics and algorithms.Īt least some of the decision-making process will be automated, meaning that there is no need for individuals to identify and evaluate for themselves. Managers will use those algorithms, strategies and custom-built models to guide their investment decisions. “But in China, people have been told that outperforming the index by 20% to 30% is normal.On the surface, a quantitative hedge fund would resemble a standard hedge fund however, there is one significant difference: a quantitative hedge fund uses algorithms and strategies to make trading decisions. “In the US, if you outperform the index by 5%, you will be better than Warren Buffett and Bill Gross,” said Jason Hsu, the chairman and chief investment officer of Rayliant Global Advisors, which actively manages some $928m. If future returns are more modest, that could be a shock for many end-investors. China’s small-cap CSI 500 index gained 3.7% on a total-return basis in the quarter, Wind data shows. Recent rules requiring quant funds to disclose net asset values regularly may have also made them more conservative, this investor added.Ī comparatively weak fourth quarter for smaller Chinese shares, the focus of many of the country’s quant investors, was another headwind. But the performance of recent listings on the less-controlled STAR Market hasn’t been as reliable.
Until recently, unwritten caps on IPO valuations ensured that shares in most newly listed companies jumped on their debut - a lucrative bet for any investor able to secure an allocation of stock, and a popular trade for quants. Several market participants, including one investor in several Chinese quant funds, said declining returns from initial public offerings had also hit performance. Hu and others said some quant investors had been wrong-footed by sudden market shifts - driven partly by changes in government policy that an algorithm built around previous market history might not anticipate.įunds are becoming larger, more alike and more tightly regulated, all factors that help explain the industry’s recent challenges, said Kangting Ye, a senior China analyst at research and consulting firm Cerulli Associates. The global quant industry has also seen the performance of various strategies vary over time. High-Flyer Quant made an unusual public apology to investors, blaming the setback both on its algorithms and the industry’s rapid growth, which it said had made funds managed by different firms increasingly similar.Īs China’s stock market matures, and quants increasingly trade against each other, the opportunities to generate excess returns are dwindling, said Bo Hu of Simuwang.īut some of the variety of investment strategies quants employ could continue to perform well. Only seven generated positive returns, with the worst performer, High-Flyer Quant, losing an average of more than 11% across its funds. “We developed strategies and trading algorithms but there was no money to run,” said Stephan Zhou, a founding partner at the firm.īut the last quarter of 2021 proved painful for the top 28. Shanghai Mingshi Investment Management, one of China’s oldest domestic quant managers, says it now manages more than $2.5bn, quite a change from the early years after its founding in 2010. Seven of the 28 generated cumulative returns of more than 100% over the past three years, Simuwang says. The quant business likely grew substantially further last year, with the number of domestic Chinese managers running more than 10 billion yuan rising to 28 from 10, according to fund distributor Simuwang. Some managers are also struggling to maintain their edge as they grow.Ĭhina’s domestic quant industry managed assets totalling some 760 billion yuan, equivalent to $119bn, at the end of 2020, according to the Asset Management Association of China’s most recent data for private securities-investment funds, the country’s closest equivalent to Western hedge funds. However, recent setbacks suggest competition to exploit inefficiencies is increasing and cutting into returns, while some algorithms may have been caught by an unexpected turn in the market. At the end of 2021, there were nearly 197 million individual stock-trading accounts in China, according to China Securities Depository and Clearing, though the number of active individual investors is likely smaller. Many say the Chinese onshore market has been fertile soil for quants because it is heavily influenced by individual traders, whose behaviour can be irrational, often in predictable ways.
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