By Samuel Shen and Kazunori Takada
SHANGHAI, April 16 (Reuters) – Ex-Wall Street bankers are
betting science can exploit opportunities in China’s often
rumour-driven stock market, with some predicting the
quant-driven fund industry to grow by as much as 10-fold to 100
billion yuan within a few short years.
Former Goldman Sachs banker Shen Yi is confident his
newly-launched 20 million yuan ($3.17 million) quant fund, which
trades purely on complex mathematical calculations
pre-programmed in computers, can beat the market.
“Models sum up history and predict the future,” said Shen,
who holds a doctorate degree in physics from Oklahoma State
University. “Markets change, but human nature doesn’t.”
Since 2010, when China rolled out index futures, margin
trading and short selling, more than 30 quant funds, or those
that use statistical models rather than fundamental analysis to
make investment decisions, have been launched, many of them by
former Wall Street bankers like Shen.
There are no official or industry data on the size of
China’s quant fund industry, but Shen, based on his knowledge of
how his rivals are doing, estimates the assets under management
to be around 10 billion yuan. He believes the industry could
grow 10-fold to 100 billion yuan in just three years.
These fund managers are betting that the quantitative
approach, which follows a set of mathematical techniques to
evaluate risk, pricing and timing of trade, can get traction in
China as mutual funds struggle to make profits in a stock market
which has fallen nearly 30 percent over the past 2 years.
“In a bull market, no one would listen to us. But now it’s
different,” said Tang Weiye, who manages about 200 million yuan
for quant-driven hedge fund Credence Oriental Partnership.
The fund has so far generated a return of more than 200
percent, helped largely by its short futures positions during
the 2008 market slump, he said.
“After all the ups and downs in recent years, investors are
saying we want some modest but steady returns and don’t want to
suffer from market volatility,” said the Stanford-educated and
former IBM programmer.
But managing a quant fund in a tightly-regulated market,
like China, is no easy task.
Chinese investors are only allowed to sell stocks on the
second day of purchase, preventing funds from conducting
intraday trading and limiting their trading manoeuvres.
Secondly, a stamp tax rate of 1 percent of transaction value
is a significant hindrance for high-frequency trading, while the
cost of stock borrowing for shorting purposes, according to
Tang, is typically around 9 percent on an annualised basis,
compared with less than 3 percent in the United States.
Another constraint is a shortage of hedging tools in China.
Index futures and short selling were introduced just two years
ago but with many restrictions still placed on how they can be
used by institutions.
“Running a quant fund in China is not easy,” said Kin-Leung
Chan, managing director of Hong Kong-based China focused hedge
fund Rega Technologies, which uses quant techniques to filter
out investment ideas.
While fund managers hope China will introduce more policies
that would benefit quant funds, regulators have so far taken a
cautious stand after quantitative hedge funds were criticised
for contributing to the market sell-offs during the 2010 “flash
crash”, when the Dow Jones index fell nearly 1,000 points
before bouncing back in minutes.
“It’s understandable that regulators are cautious towards
things that they’re not familiar with,” Shen said.
But the development of quant hedge funds would actually help
regulators’ efforts to curb excessive speculation and boost
liquidity, he argued.
For example, when a certain stock is over-valued relative to
its peers, certain quant models would generate and execute a
sell transactions to seize on the investment opportunity.
“It’s easy for investors to get emotional and prejudiced
when trading, but computers don’t,” said Liu Zhen, former
U.S.-based money manager at Brevan Howard and D.E. Shaw who now
heads E Fund Management Co’s quantitative investment department.
“Exploiting those human weakness is how quant make money.”
