Quant Giant’s Rare Advice to Pull Cash Shows China Market Woes

May 24, 2022

(Bloomberg) -- It’s a sign of the times for algorithm-driven trading firms in China: one of the nation’s biggest quant shops advised some clients to take their money back.

Earlier this month, the marketing head at Zhejiang High-Flyer Asset Management suggested that certain clients sensitive to volatility fully redeem their money as the market is more likely to fall further than rebound, in comments which were confirmed by the hedge fund.

The unusual move underscores an increasingly challenging environment for Chinese quants as the economic fallout of the war in Ukraine accelerates a stock-market slump and some of the industry’s trades become increasingly crowded.

After gaining 20.5% last year, the nation’s 28 biggest private quants - the local equivalent of algorithm-driven hedge funds - lost 3.8% on average this year through Feb. 22, according to Shenzhen PaiPaiWang Investment & Management Co., a local research provider. High-Flyer lost 10% over the same time period, while a benchmark stock index fell 7.4%.

With China’s stock markets in free fall, quant losses may have widened further in recent weeks. Since the invasion, a gauge of Chinese shares in Hong Kong has plunged 18% in the world’s worst performance among actively traded benchmarks. The CSI 300 index is on track for its weakest quarter since 2015.

Last year’s performance helped quant funds grow their assets almost 80% to 1.6 trillion yuan ($253 billion), according to Citic Securities Co. estimates, which are widely cited amid a lack of official data.

The surge in assets has strained the capacity of some funds to keep returns stable in current market conditions, which is weighing on performance, Yan Hong, director of the China Hedge Fund Research Center at the Shanghai

Advanced Institute of Finance, said in an interview.

“The heightened market volatility and rapidly shifting market trends are making it more difficult to adjust,” he said.