Shanghai-based Power Asset Management has closed its options arbitrage strategy following significant losses amid recent market volatility, making it the latest Chinese hedge fund to be impacted by unpredictable stock movements linked to government stimulus efforts, according to a report by Reuters.
The fund, which aimed to profit from small pricing gaps in derivatives, lost over $10m in the past month — its largest loss to date. Power Asset, which held around RMB400m ($56m) in assets under this strategy, attributed the setback to a dramatic surge in stock prices fuelled by China’s economic stimulus measures.
“Our options strategy was severely impacted due to unexpected market changes,” Power Asset said in a statement, with the firm’s flagship fund also seeing a 20% decline in value last month.
China’s recent stimulus measures spiked trading volumes and pushed volatility to record levels since their announcement on 24 September. As options granting the right to buy shares surged in demand, their prices skyrocketed, stretching the market beyond typical patterns. Global and local hedge funds, including Winton, Beijing X Asset Management, and Techsharpe Quant, were also affected by this market shift, especially those selling low-priced “call” options, which became suddenly expensive.
Previously, Power Asset’s arbitrage strategy was one of its most successful, typically yielding profit from minor discrepancies in derivative prices. However, the firm acknowledged the inherent “tail risks” involved in this high-probability strategy — small-probability events that can lead to substantial losses. Power Asset’s founder, Chen Pao, noted in July that the fund had won trades 90% of the time, though the strategy relies on swift loss-cutting to manage such rare risks.
