CHINA’S top quantitative hedge funds are defending the beleaguered industry against pundit calls to ban algorithm-driven trading following regulatory tightening.
Yanfu Investments and Zhejiang High-Flyer Asset Management, two of the largest quants managing more than 100 billion yuan (S$18.5 billion) combined, published rare articles this week in response to “misconceptions” about quant investing. Quants are being blamed for any market fluctuation even when evidence suggests otherwise, High-Flyer wrote on its Wechat account on Wednesday (Jul 17).
The rebuttals came days after Liu Jipeng, a prominent economist, called for a “decisive” ban on quant investing, saying such firms would rid “even the smallest fish in the pond”. Liu drew widespread support on social media platforms such as Weibo.
Quants are facing growing scepticism in China’s retail investor-dominated stock market, especially after authorities punished two such firms for violations during the meltdown earlier this year. Authorities have imposed tighter rules on programmed trades, but refrained from enacting further drastic measures that would cripple the industry.
After the regulator suspended China Securities Finance’s business of lending securities to brokerages earlier this month, the move won broad acclaim, Pi Haizhou, a commentator and an opinion leader on Weibo, said on Wednesday.
The way quants increase market liquidity is “filled with evil” because they profit from small investors’ losses and quant trading “shouldn’t be tolerated”, he said.
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Regulators have been tightening supervision of quant trading, and pledged to increase the costs of high-frequency trading to slow their speed. Private stock quants’ combined assets under management slumped by 35 per cent in the first half to 780 billion yuan as at Jun 30, according to Citic Securities, as the recent restrictions on short selling jeopardised long-short products.
High-Flyer sought to fight back that narrative, explaining that quant strategies’ sources of profit are diverse. They include holding stocks with solid fundamentals for a long time and trading against irrational volatility, which helps iron out the fluctuations.
The most important pattern quants use in trading China’s A shares is the so-called “reversal factor,” which suggests their models tend not to chase surging stocks or dump falling shares, according to High-Flyer’s article.
Quant firms are also lowering their trading frequency and extending their holding periods to expand asset management capacity, Shanghai-based Yanfu wrote in an article on Jul 15.
It refuted claims that quants don’t contribute to “long-term” money. Their mainstream strategy is the long-only stock enhanced products, which always maintain full positions and do not time the market as they are only evaluated on excess returns that stem from mispricing in the market. BLOOMBERG
