China A-shares have increasingly become part of leading global benchmarks, while that nation’s economic growth and prospects remain one of the strongest in the world.
One way of managing today’s unpredictable environment is to take an active quantitative approach to investing in A-shares. PineBridge Investments (PineBridge) believes an active quant strategy can systematically identify mispriced companies throughout the deep China A-share market, adding different sources of alpha to complement an investor’s existing portfolio.
Using proprietary data-driven models, active quant strategies can efficiently rank and select companies according to certain factors (for example, fundamental drivers like earnings and valuation) while incorporating disciplined risk management and cost efficiencies.
Today, active quant strategies account for only 4% of all active equity strategies in the A-share market, leaving ample room to grow.
IDIOSYNCRATIC MARKET RIPE FOR QUANT
The unique characteristics of the A-share market provide a source of diversified alpha that is stronger and more persistent than that of many developed equity markets, such as those in Hong Kong and the US. The dispersion of returns in A-shares provides a deep and compelling opportunity set for active managers.
Looking closer at the variance of return sources in the A-share market, we find that stock- and factor-specific risks play an important role in driving returns, presenting alpha opportunities ripe for active approaches.
Moreover, over 85% of total trading volume is driven by retail investors who generally rely on price momentum, speculation, and headlines rather than fundamentals, when making investment decisions. This type of investment behaviour can add to volatility and lead to pricing inefficiencies that a skilled active manager can exploit.
The above-mentioned market characteristics provide ample reasons why investors should not lose sight of opportunities in the A-share market despite the ongoing trade dispute.
By combining fundamental inputs with sophisticated algorithms, active quant strategies offer investors greater precision in alpha harvesting while balancing risk and cost constraints. As quant investing is relatively new to China compared to developed markets, investors should seek onshore partners with a strong track record of investing in China A-share quant strategies across different market environments.
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