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(Bloomberg) — Many of China’s beleaguered quantitative funds are on the mend, but the ones leading the recovery are using the same computer models that helped them endure years of market turmoil. I’m sticking to it.
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The top 23 quantitative funds tracked by China Merchants Securities outperformed their benchmarks in the week ending Feb. 19, some by as much as 12.5 points, after a sharp decline earlier in the month. Most companies still lag behind the broader market, but Yanfu Investment Co. and Shanghai Manfeng Asset Management Co., Ltd., which have stuck to algorithms, are still lagging behind the broader market, according to data and interviews with executives reviewed by Bloomberg News. The companies led by the firm outperformed throughout the period of turmoil. .
China’s private quantitative industry, which manages 1.6 trillion yuan ($223 billion) in assets, is poised for a shakeout amid unprecedented regulatory scrutiny and rapidly changing market trends. The vastly different responses during the crisis demonstrated managers’ ability to balance the pursuit of additional profits with risk management, as investors reassess their faith in algorithm-driven portfolios.
“When a large-scale disaster occurs, some species that have adapted well will go extinct, while others will subsequently thrive,” said Edward Liu, chief investment officer at Manfeng. “The same goes for quantitative investing.”
Chinese quantitative hedge funds suffered record weak relative returns last month as small-cap stocks that have helped them beat the market in recent years slumped. Regulators have also cracked down on some quantitative trading strategies in an attempt to end the stock market crash. Meanwhile, government-backed funds focused their support on large-cap stocks, driving the broadest rally since February 19.
Many quantitative stocks were caught off guard, and their returns reflect a roller coaster market. After a sharp rebound after the Lunar New Year, most of the quantitative stocks tracked by Merchants Securities underperformed the CSI500 index in the last week of February, but rose above the benchmark again last week. Overall, at least nine of the 12 top players tracked by the brokerage firm’s enhanced CSI 1000 index product have outperformed their respective benchmarks over the past three weeks.
The increased disruption and scrutiny has caused many companies to reevaluate their strategies. According to Manfeng’s Liu, the past two quantitative crises in China since 2014 have led to technology and strategy upgrades, followed by industry restructuring.
“This time is no exception,” he said.
Companies like Manfeng outperformed by sticking to their model, even as many rivals tweaked and, in some cases, increased their losses. Of the 41 quantitative stocks tracked by CITIC Securities in response to the crisis, only eight stocks avoided human intervention, according to data reviewed by Bloomberg. Seventeen of these companies reorganized their portfolios, primarily by selling out small-cap stocks and buying large-cap stocks.
Below is a summary of how some funds have responded to the crisis that some have dubbed the “quant earthquake.”
No intervention
Mr. Manfeng was cautious from the start, avoiding stocks with market capitalizations below 2.7 billion yuan. Deep learning was then used to weed out even more stocks, which led to a contrarian trend. Its high volume helped limit unwanted exposure to sectors and stocks large and small, Liu said.
The strategy would have struggled last year as many quantitative stocks benefited from the small-cap rally, but it helped avoid a collapse this year. Manfeng’s CSI 500-enhanced product outperformed the index by 1.2 percentage points as of March 8 this year, while funds tracking the small-cap CSI 1000 outperformed the index by 12 percentage points.
The company “couldn’t eat meat, so they weren’t beaten,” Liu wrote, quoting a Chinese proverb.
DMA products
Tighter risk controls also helped Pinestone Asset Management in its market-neutral products, which used so-called direct market access services to boost leverage by up to 300%. Bloomberg earlier reported that officials told quantitative firms to phase out some DMA products for accelerating the meltdown.
Although they did not intervene, Pinestone managers learned that their model automatically reduced the leverage on these products to about 100% in late January, according to trading director Chris Huang. He said he noticed it. By deleveraging, we were able to limit the maximum drawdown to 9% and avoid forced sales.
Yanfu Investments, which has assets of more than 50 billion yuan, outperformed the CSI 300, CSI 500 and CSI 1000 indices by 1.9 percentage points this year. The main CSI 300 index is up 4.1% this year through March 13, after three consecutive years of decline.
The Shanghai-based firm, led by former Two Sigma Investments researcher Gao Kang, said in a letter to investors that Yanfu had “firm confidence in the recovery” once the panic eased. ” he said. “We knew that not manually intervening in these situations was the right choice.”
Shanghai Minghong Investment Management, which manages more than 50 billion yuan but did not intervene, also exceeded all three criteria, according to Merchants Securities data.
Companies intervening
Portfolio shuffling has sometimes resulted in regulatory penalties. Ningbo Lingjun Investment Management Association had its account frozen for three days after selling 2.57 billion yuan worth of shares in one minute. The company is one of China’s four largest quantitative companies, with more than 10 billion yuan under management.
Hangzhou-based Longqi Scientific Investment moved to reduce risk on February 5, lowering its weight in a sub-strategy that targets small-cap stocks. The company’s managers stopped tightening their stock selection, but sold small-cap stocks two days later, only to miss out on the CSI 2000’s gains.
In a response to Bloomberg News, Ronchi said it was a “very low probability” event with “extremely violent consequences.” The company either had to rely completely on this model and suffer “possibly intolerable losses” or had to intervene to ensure its survival, the company said.
More broadly, quantitative investors will become more cautious in their pursuit of market-beating returns and are likely to drive greater use of artificial intelligence, Manfeng’s Liu said. While DMA is disappearing, we are also seeing major changes in product structure, as the positioning of various products becomes clearer.
“Confidence in the big funds is weakening, which could result in a decline in assets in the big funds” as investors look for new managers, he said. “It’s like shuffling the cards again.”
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