HEDGE FUNDS STRUGGLE TO CALM INVESTORS
China’s quant market facing severe losses apart from stricter scrutiny, says UBS
CHINESE hedge fund managers are scrambling to soothe investors after a rout in small-value stocks, even as regulators step up scrutiny of major market players’ activities as they try to revive the country’s ailing stock markets.
Firms such as High-Flyer Quant Investment and Baiont Quant, which are hedge funds that deploy quantitative strategies using mathematical and statistical techniques, wrote to investors this week explaining their recent glaring underperformance and promising to beef up risk management, according to letters verified by Reuters.
Chinese quant funds — which trade using data-driven computer models — are highly exposed to small-cap stocks which started plunging early this month, triggering panic-selling.
Many quant products lost more than 15 per cent of their value in just a week.
Meanwhile, the sector, worth US$260 billion by UBS estimates, faces tighter regulatory scrutiny.
China’s stock exchanges said this week that quant fund giant Lingjun Investment had broken rules on orderly trading and barred it from buying and selling for three days.
“Onshore quant funds are facing severe losses and liquidation pressure, apart from stricter regulatory scrutiny,” UBS said in note.
“If they reduce fund size and decrease trading activities, it may affect market liquidity, especially for small caps.” China’s mid- and big-cap stocks rebounded sharply earlier this month on suspected state support but that accelerated a sell-off in small-caps, deepening a liquidity crisis in a corner of the market quant funds are heavily exposed to.