Several quantitative hedge funds in China faced significant setbacks on Friday as the country’s equities experienced their biggest rally in years, with a technical glitch at the Shanghai Stock Exchange exacerbating their problems, according to a report by Bloomberg.
The report cites unmanned sources familiar with the situation as confirming that the losses stemmed from short positions in index futures linked to Direct Market Access (DMA) strategies, which some firms employ. A technical glitch meanwhile, compounded the issue, leaving some funds unable to sell assets to cover margin requirements, according to one source.
These losses come as the quant funds are still recovering from record declines during February’s market meltdown, when small-cap stocks favoured by many of these strategies plummeted, prompting regulators to call for the phasing out of DMA products. Now, the hedge funds find themselves wrongfooted once more as China’s recent economic stimulus measures triggered the biggest weekly equity rally since 2008.
While Friday’s drawdowns in DMA products were significant they were less severe than this seen in February, according to Bloomberg’s sources. Some brokerages have even extended deadlines for quant clients to meet margin requirements for their index futures bets, they added.
DMA strategies typically employ high leverage and involve taking long positions in individual stocks while simultaneously shorting stock index futures. On Friday, the surge in index futures outpaced gains in stocks, flipping the usual discount to a premium and inflicting losses on market-neutral positions.
The Shanghai Stock Exchange meanwhile, conducted stress tests over the weekend, in a bid to protect against ongoing problems this week.
The exchange requested brokerages to join the tests after its systems struggled to handle a surge in trading activity on Friday, when Chinese stocks soared. In a statement, the exchange noted that it processed 270 million transactions during the weekend simulations – double its previous peak and three times the volume of orders seen last Friday.
