Market boost: China stocks rallied in late September, after the government issued more measures to support the economy. That helped fuel liquidity and temper price swings. — Bloomberg
SHANGHAI: Chinese quantitative hedge funds are experiencing a strong rebound in the final quarter of 2024, salvaging an otherwise challenging year marked by record drawdowns and regulatory clampdowns.
On average, quant long-only products beat stock market benchmarks by 9.9 percentage points last year, mostly on the back of returns in the fourth quarter, according to data compiled by Shenzhen PaiPaiWang Investment & Management Co.
That has prompted investors to chase top performers and put money into such vehicles again.
Definite Capital Management’s index-enhanced product, which tracks the CSI 500, beat the gauge by nearly 50 percentage points.
It raised 1.5 billion yuan (US$205mil) within minutes when its product went on sale at Guotai Junan Securities Co in late December.
Yanfu Investments LLC, which emerged in June as one of the biggest winners from the industry shakeup, became the biggest quant fund in China, expanding its assets by at least 25% to more than 70 billion yuan since April last year, according to sources.
China stocks rallied in late September, after the government issued more measures to support the economy. That helped fuel liquidity and temper price swings, allowing computer models to readjust and pull quants back from the brink.
The recovery boosted Guotai Junan Futures Co analysts’ confidence in the sector.
The growing dominance of retail investors in China’s stock market means there will be ample mispriced opportunities for quant funds to trade on, analysts led by Qu Xinrong wrote in a Dec 27 report.
“We believe that Alpha strategies still have a solid foundation for profitability,” they wrote.
Such optimism was rare early last year.
Quants suffered steep losses during a stock meltdown when their favourite small caps collapsed.
It dragged down index-enhanced products while state-led buying pushed up broader indexes, catching funds off guard.
Regulators also imposed trading restrictions, punishing a few quants for violations, and phasing out a star strategy before tightening rules on programmed trading.
The combined assets under management of quant firms slumped 20% in the first three quarters of last year to 1.3 trillion yuan, according to estimates by Citic Securities Co.
Their market share fell to 26% as of the end of September from 29% as of end-2023.
Then in late September, a blitz of government stimulus measures fuelled the biggest stocks rally in more than a decade.
While an initial surge short squeezed market-neutral products and some funds even faced liquidation, the rebound held ground as retail investors rushed back in and liquidity stayed at elevated levels.
That brought fresh opportunities for quants especially boosting returns at high-frequency trading firms.
For Definite Capital’s CSI 500 enhanced index fund, the final quarter contributed more than half of its excess returns for the full year.
The strategy covers about 2,000 stocks and its model makes predictions every minute for share price movements in as soon as the next hour.
“The key was that the market recovery brought more trading opportunities, allowing us to capture some impressive alpha,” chief executive officer Jiang Linhao said in an interview. — Bloomberg
