China’s quantitative hedge funds are staging a sharp recovery after suffering heavy losses during July’s market selloff, with popular index-enhancement strategies once again outperforming their benchmarks, according to a report by Bloomberg.
The rebound offers some evidence of the resilience of the country’s RMB2.6tn ($387bn) quant industry, although the recovery remains uneven and many managers have yet to make up the losses suffered during last month’s rout.
Data from Shenzhen-based hedge fund tracker PaiPaiWang Investment & Management showed that the average return among 692 index-enhancement products was 9.1% in the week through August 7. That was 2.9 percentage points ahead of the average gain across the underlying stock indexes.
The strategies are designed to beat their benchmarks by generating additional returns, or alpha, through quantitative models. Their recent performance suggests some of the factors that broke down during July’s selloff are beginning to function normally again.
China’s long-only quant funds were particularly badly hit during the July decline, losing an average of about 17% as investors sold technology and artificial-intelligence related stocks.
The recovery has been especially pronounced among the small- and mid-cap stocks favoured by many quantitative managers.
The CSI 1000 index rose about 10% during the first two weeks of August after falling 20% in July. The larger-cap CSI 300 gained around 2% over the same period following an 8% decline in July.
China Merchants Futures said all seven index-enhancement strategies it monitors generated positive alpha during the week ended August 14. Products tracking the CSI A500 and CSI 500 each outperformed their respective benchmarks by 1.2 percentage points.
PaiPaiWang attributed the rebound to a combination of factors, including a technical recovery from oversold conditions, renewed market liquidity and the revival of quantitative signals based on price and trading-volume data.
The rapid reversal illustrates both the strengths and vulnerabilities of systematic strategies. Quant models can respond quickly when market conditions normalise, but crowded positioning and sudden changes in market structure can cause multiple strategies to suffer simultaneously.
Shanghai-based Mingshi Investment Management provides an example of the speed of the recovery.
Its all-market quantitative stock-selection strategy gained 16.6% during the first week of August, according to an investor letter. The strategy had been hurt in July after its models built a significant technology exposure that had previously contributed to strong returns during the first half of the year.
Rather than manually overriding the model during the selloff, Mingshi said it allowed its signals to determine portfolio changes. The strategy added to technology positions during the initial market panic before subsequently shifting towards other sectors as market conditions changed.
The approach helped the fund gain another 2.1% in the week through August 14, taking its return for the year to 25.4% and placing it among the strongest performers tracked by Guolian Minsheng Securities.
Other managers have also posted strong rebounds. Hangzhou-based Everon Quant recorded one of the most consistent improvements in excess returns across the CSI 300, CSI 500 and CSI 1000 during the week, outperforming the CSI 300 by 1.96 percentage points.
Hainan Semimartingale Private Fund Management, based in Shanghai, beat the CSI 500 by 2.4 percentage points during the same period, taking its year-to-date excess return against the index to 17 percentage points.
Despite the sharp improvement, China’s quant sector has not fully recovered from July’s losses.
Less than 8% of long-only quant funds had completely recovered their average 16% July decline by 7 August, according to PaiPaiWang. By comparison, 13.5% of hedge funds overall had recovered their July losses.
