China emerging as new base for quant hedge funds

Foreign and home-grown quant specialists are planning hedge fund launches out of China.
China emerging as new base for quant hedge funds

China is set to see a crop of quantitative hedge fund launches by mainland Chinese quant specialists, according to a panel of fund of hedge fund (FoHF) executives at the Battle of the Quants conference last week in Hong Kong.

A retrenchment of staff in investment banks and hedge funds in the US has led to the sacking of quant specialists – many of who hail from mainland China or India, says Theodore Qi Shou, a Hong Kong-based portfolio manager at Skybound Capital, a FoHF firm. “They will launch new quant funds or join traditional hedge fund managers to enhance portfolios with their quant skills.”

In China, one fast-developing area is in the commodity trading advisor (CTA) space, where proprietary computer-driven trading systems are used to take long or short positions in futures contracts.

“Interestingly, one of the world’s largest CTA managers is now doing research in mainland China and trying to launch a local CTA product,” says Shou. The vehicle will prospectively trade the equities of mercantile exchanges in China, in addition to foreign exchange, equity and fixed income assets on the mainland.

“This is just one example," he notes. "Quant managers are already there in mainland China, and many of them are already doing quasi-CTA products. But they are definitely going to grow very rapidly in that market because the demand is there.”

One of the biggest China CTA players is PCA Investments, a Hong Kong-based hedge fund manager backed by mainland sovereign wealth fund China Investment Corp. It launched a CTA fund in mid-year with the goal of raising $750 million in AUM.

CTAs and other quantitative hedge funds tend to attract investor attention during bear markets, as the computer-driven stock-picking tactics of some individual funds can outperform their hedge fund counterparts that are helmed by portfolio managers.  

According to industry data provider Eurekahedge, hedge fund performance on a global basis was down 0.65% in November, although CTA funds gained 0.71% in the same month.

Investment in CTA funds worldwide reached $320 billion in the third quarter of this year, as estimated by BarclayHedge, up from $291 billion in the first quarter. It's a small, but growing sub-sector of the $1.7 trillion global hedge fund industry, with a trend of new launches expected in the coming year.

“If you look at the performance of the Barclay’s CTA [Index] over the last 30 years, it has outperformed any other alternative asset class,” says Michiel Steenman, managing director of Geneva-based Steenman Asset Management. “Over a very long period of time [it gives] very good returns.”

Steenman takes the view that “a long investment horizon is absolutely necessary when you invest in CTAs and with a long investment horizon; we’re pushing it out to 10 years”.

While a decade is considered by many investors to be a lengthy time to be committed to a hedge fund, he points out:  “We also take into account that you can easily encounter a period of drought – negative returns for say, 36 months. That’s something that you have to take in hand.”

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