Pinestone Asset Management, which has been a rare success story in China’s struggling quantitative hedge fund sector, faces serious challenges following a US indictment accusing Co-Founder Xiao Zhang of trade secret theft, according to a report by Bloomberg.
The charges allege that Zhang misappropriated proprietary code from his former employer, casting doubt on Pinestone’s success and raising broader concerns about intellectual property in the hedge fund industry.
Launched just two years ago, Shanghai-based Pinestone soared to prominence this year after outperforming rivals during China’s market downturn, often referred to as the “Quant Quake.” By early 2024, Pinestone’s assets under management had surged to RMB10bn ($1.4bn), largely due to its advanced trading systems and risk management approach, which helped it navigate a sharp collapse in small-cap stocks in February. However, the recent US indictment alleges that Zhang took software code and projects from his previous employer, a global investment firm, which he allegedly used to gain an edge at his new fund.
According to US federal prosecutors, Zhang accessed his former employer’s network using a virtual private network (VPN), bypassing geo-blocking measures to download and copy proprietary information. These actions purportedly took place shortly after his return to China in 2021. The indictment, which does not name the firm, claims Zhang unlawfully transferred sensitive data through a file-sharing app, bypassing company security protocols.
Pinestone and Zhang have not issued statements on the allegations, though Zhang has reportedly hired legal counsel in both the US and China. Pinestone, meanwhile, is working to reassure investors, according to insiders, while remaining silent on the potential fallout from the case.
This is not the first time a former employee of a US quantitative firm has been accused of stealing proprietary code. Nearly a decade ago, ex-Two Sigma Investments analyst Gao Kang pleaded guilty to similar charges and later returned to China, where he founded a successful quant firm.
Zhang’s professional background aligns with the US allegations – before founding Pinestone, he worked at Arrowstreet Capital, a Boston-based investment firm focused on global equity markets. The indictment refers to his role as a Support Associate, a position that contrasts with Pinestone’s descriptions of him as a Senior Strategist who independently developed models.
