Selena Li, Samuel Shen

SHANGHAI/HONG KONG – China’s algorithm-driven quant fund boomed in 2021, as investors looked for alternatives to a slow stock market. But the end of the year witnessed some “flashboys” weighed down by volatility and their size.

Quant, China’s top-ranked hedge fund, apologized last week to its investors for the record performance slump. It manages approximately 100 billion yuan ($15.69 trillion) and blames the slump on wild swings in investor sentiment as well as crowded trades within a sector “growing too rapidly in size”. This public apology by high-flyers is reminiscent of a similar setback suffered in 2021 by Shanghai Minghong Investment Management Co. It was another quantitative heavyweight fund, that experienced losses after a spike in assets under administration (AUM).

Wang Li (chairman of Hangzhou Liberty Fund Management Co.) stated, “When you are small, high frequency, rapid-trading techniques could create very attractive performance charts.” The strategies cease to work after the big money pours in.

High-frequency traders are also known as flash boys. They rely on market momentum and gyrations to make their trades work. However, if too many people bet the same way, it can lead to inefficiency.

If such funds become too big, they can’t move fast enough to exploit market opportunities.

Simuwang.com, a fund distributor, reported that a High-flyer Quant Fund, which is designed to increase returns on the CSI500 Index’s CSI500 Index Index, suffered a 13.1% loss during the quarter despite gaining 3.6% in its underlying index. This wiped out the majority of 21.9% gains made in the nine previous months. Another high-flyer fund used hedging strategies to lose 12.1% in the third quarter of 2021. The year’s performance was 8.1%. Citic Securities has estimated that the sector’s turnover increased tenfold in four years, to 1 trillion Yuan. The daily turnover of China’s Ashares market topped a trillion Yuan most days by 2021. Kaiyuan Securities reports that around 25 hedge fund managers who use quantitative strategies saw their AUMs exceed 10 billion dollars last year. Many, including High Flyer, had AUMs exceeding 100 billion Yuan. Quant funds are designed to provide absolute or higher returns and were created by investors who rushed in during an era of regulatory crackdowns that roiled the stock market. China’s blue chip CSI300 Index fell 5.2% in 2021 despite record-breaking local stock turnover. This was due in part to the growth of quickly trading quant funds. Shi Ke from iFund Asset Management Co said, “Their size is too large.”

Some clients had lower returns than the benchmark last year while others experienced paper losses. High-flyer Quant expressed his regret in the letter and promised to increase research investments. SHQX Asset Management is a Shanghai-based hedge-fund manager. He said that many CTA funds (which trade commodities with quantitative strategies) suffered from the slump in commodity prices towards 2021. In the sector, there are growing signs of caution. Many fund managers including Tianyan Capital, High-flyer and Evolution Asset Management have stopped accepting new funds for certain or all of their products.

Regulators are more concerned about rapid growth.

Yi Huiman, a top securities regulator said that September’s growth in “quants,” was posing a problem for stock exchanges. As a self-regulating body for the industry, The Securities Association of China demands more information from key quant players. Yin Tianyuan (based in Shanghai, head of research for data provider Suntime Information), claims that some quant managers have taken the heat off of trading. She said that the 100-billion-yuan quants in China are almost all having their frequency of trading reduced to “medium high”.