Chinese quantitative hedge funds have experienced significant setbacks in the first half of the year, falling short of the returns achieved by traditional stock strategies and other popular global investment approaches. This downturn is causing a notable shift within the $200 billion industry, with some firms contemplating withdrawal from the market, according to industry sources.
Importance of the Situation
The sharp decline in performance for these fast-expanding quant funds is a key concern as Beijing intensifies efforts to rebuild retail investor confidence. The global investment community is closely monitoring whether these funds can recover from the losses incurred during February’s market disruption, dubbed China’s “quant quake,” and adapt to the new regulatory landscape which includes restrictions on short-selling and high-frequency trading.
Performance Data
Quantitative hedge funds focused on China’s onshore A-shares saw an average decline of 8.6% in the first half of the year, a stark contrast to their 3.2% gain throughout 2023. Funds tracking the small-cap CSI 1000 Index fared worse, plummeting 14%, while onshore equity hedge funds experienced a milder 3% loss, as reported by China Securities.
As of June 2024, the number of quant hedge funds in China managing assets exceeding 10 billion yuan ($1.37 billion) dropped to 30 from 32 at the end of 2023, according to data from PaiPaiWang Investment and Management.
Background
Quantitative funds, which leverage computer algorithms to drive investment decisions, had previously delivered robust returns, particularly through investments in small-cap stocks. However, their performance deteriorated in February as state-supported investors shifted focus to large-cap stocks. Additionally, China’s securities regulators have issued warnings about the advantages these funds have over retail investors and introduced stricter trading rules.
Expert Opinions
Jonathan Caplis, CEO of PivotalPath, remarked, “Market dynamics turned against China-focused quants, leading to some exiting the market. The new short-selling regulations are likely to further challenge the viability of these funds.”
Patrick Ghali, managing partner at Sussex Partners, noted, “Despite the size of the Chinese market, investors are now approaching it with heightened caution.”
Erin Wu, head of investor relations at OP Investment Management, commented, “The quant crisis in February tested the resilience of these funds in extreme conditions. Those that managed to withstand the impact and can recover swiftly will stand out.”
($1 = 7.2748 Chinese yuan)
