As China’s stock market struggles to recover, regulators have started to probe some hedge funds and brokerages on quantitative trading strategies amid a growing outcry against a sector able to profit from share price falls and volatility. The China Securities Regulatory Commission (CSRC) has checked with several significant brokers over the past weeks about their quant clients’ short-selling activities and trading strategies – funds that trade rapidly using derivatives and data-driven computer models.
The booming investment in quant trading is fuelled by the massive opportunity of the country’s A-share market, which is bigger than the New York and Nasdaq combined. It is also one of the most liquid markets in the world, thanks to heavy trading by Chinese retail investors. Moreover, the country’s accelerated economic liberalization, market reform, and technological advancement are making the onshore equity market more accessible to foreign investors.
However, investors should not be fooled by the rosy picture painted by some analysts, who say that China’s stock market is overvalued and that a significant correction could be near. Several factors are at play, including mounting tension between the US and China, which drives investors to seek safety in other emerging markets.
China’s stock market has also been weakened by concerns about the country’s debt load, slowing economy, and Beijing’s handling of the pandemic. This has also sparked fears that the government may take steps to cool the market, potentially triggering more selling and hurting long-term investors.
Some local investors have begun blaming quants for the market’s weakness, describing them as the “wolves arriving” on a quiet day. The state-run Securities Times recently reported on an unnamed quant fund manager who said its local competitors had boosted liquidity in the market by up to 20 percent and were using their power to push up shares.
Amid the current gloom, Chinese regulators are weighing whether to toughen up rules on short-selling and limit leverage, sources close to the matter said. However, many experts believe the market needs to stabilize before introducing such measures, especially as there’s little sign that the CSRC is ready to do so.
As for the possibility of a brokerage-level crackdown, Qiang says that further liberalization of commission fees, pushed forward by the CSRC, would intensify peer competition by forcing companies to lower their rates to attract more investors in a slumbering market. “The CSRC should focus on regulating market participants rather than pushing brokerages to reduce their commission fee levels,” he said.
While the industry is grappling with a challenging environment, China’s multi-strategy quant funds have performed much better than their long-only counterparts. According to PaiPaiWang, a research company that tracks the performance of funds running over 10 billion yuan in assets, multi-strategy quants have gained 64% in the five years that ended in 2020. This compares to a 12% loss by actively managed long-only stocks.
