Computer-driven hedge funds are betting that China’s financial markets offer plenty of money-making opportunities despite the exodus of foreign investors, rising U.S.-China tensions and increasing scrutiny from regulators.
China’s CSI 300 stock index has fallen nearly 9 percent this year, compared with a 19 percent rise in the U.S. S&P 500, amid concerns about Beijing’s lack of strong policy support in response to a crisis in the real estate sector. Much of the foreign money that flowed into Chinese stocks at the beginning of the year has now flowed out.
Still, some European quantitative funds are moving to China to deploy their complex trading algorithms in markets that often move out of step with the US.
London-based hedge fund firm Aspect, which manages about $8 billion in assets, is setting up an office in Shanghai, according to a person familiar with the matter. The company already has a qualified foreign investor license, which gives it access to additional Chinese futures contracts. The company declined to comment.
Meanwhile, Paris-based Metori, which manages about $700 million, plans to launch a fund for Western investors next year that will trade exclusively in Chinese assets.
“[Western investors] We still see Chinese futures as a unique source of diversification,” said Metori CEO Nicolas Gaussel.
“We are very excited about China because the correlation of Chinese assets with everything else we have in our portfolio is low, which provides diversification,” said Philippe Jordan, president of quant fund CFM, which has $10 assets billions of US dollars under management. It trades Chinese stocks and commodities.
Tensions between the U.S. and China over trade and Taiwan’s future have been a key factor in some foreign investors turning away from the Chinese market this year.
A Bank of America survey of Asia-focused fund managers in October found that 55 percent of respondents were either waiting for more credible signs of improvement in China’s economy or were actively looking for opportunities elsewhere.
“I think the tensions are leading to lower allocations [from US investors to China]“, said the head of capital introduction at a large bank.
However, some quant managers argue that the withdrawal of other foreigners gives them even more opportunities to make profits because it reduces the number of investors trying to exploit the same market trends and patterns.
A manager at one firm said that “if Chinese leaders were too open to the West,” the additional profits their fund could make would “disappear too quickly” due to increasing competition.
The optimism among quant traders comes despite signs of increased regulatory scrutiny of the growth sector and concern among some retail investors who suspect quants are profiting at their expense.
In September, China’s securities regulator pledged to strengthen supervision of quantitative and other automated trading activities to mitigate the “increased risk of market volatility” that it said such trading strategies can lead to in certain circumstances. The regulator also issued guidelines to the Shanghai and Shenzhen exchanges on how to monitor these trades.
Reuters reported this month that regulators are restricting some forms of leverage that hedge funds access through customized derivatives contracts.
“It’s going to be a little bit difficult in the short term,” said Kher Sheng Lee, co-head of Asia Pacific and deputy head of government affairs at hedge fund trade group the Alternative Investment Management Association.
Quant funds are now met with criticism from domestic investors. In September, popular economist Ren Zeping called on the Chinese government to halt the activities of quantitative funds because of their impact on retailers and the broader market.
“Quantitative trading has become a big crescent to harvest a large number of small and weak retail investors, causing serious damage to the A-share market and having a very adverse effect on investor protection,” he wrote on Chinese blogging website Weibo .
Executives at quant firms operating in China say they need to be very sensitive to the demands of local regulators, citing the $97 million fine imposed on market maker Citadel Securities in 2020.
Still, they point to a move by Chinese futures markets to become increasingly open to foreign investors, and say that despite recent scrutiny, regulators and policymakers are still becoming more accepting of foreign hedge funds.
Stock exchanges in China announced last year that they would make additional futures and options contracts on assets such as soybeans, white sugar and peanut kernels available to international investors who hold so-called qualified foreign investor licenses.
“We are starting to see that regulators recognize that the hedge fund manager plays an important role in the market by providing better liquidity and reducing transaction costs,” said Melody Yang, a partner at law firm Simmons & Simmons in Beijing.
This follows a new futures and derivatives law passed in China last year that unifies rules for China’s futures markets across different exchanges. The law also brought greater legal certainty to situations where a counterparty defaults on a bespoke derivatives trade.
Yang added that the regulation could be seen as a positive development. “When regulators start to recognize the legality of something by officially regulating [it], The . . . can be a very positive signal in China.”
The law’s passage was seen as a significant moment for Western managers operating in China, who have been pushing for greater legal certainty in derivatives markets for many years.
“There were absolutely more permissive laws. . . “China is opening up,” said the CEO of a multibillion-dollar quantitative fund that trades in the country. “Any new market that opens and has capacity is hugely important to large companies desperate for cash.”
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