China Quants Saw Assets Shrink After Stock Meltdown Hit Returns

(Bloomberg) -- China’s quantitative hedge funds saw their assets drop last quarter for the first time since late 2022, after the nation’s stock-market meltdown hit performance and eroded investor confidence in their algorithm-driven trading strategies.

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Quants’ combined assets under management fell to 1.57 trillion yuan ($217 billion) as of March 31, down 4% from the end of last year, according to estimates by Citic Securities Co. That was the first decline since the third quarter of 2022, according to China’s largest securities brokerage, which compiles quarterly reports on the industry.

Many Chinese quant funds saw unprecedented drawdowns in February when their favorite small-cap stocks crashed. Managers are struggling to regain momentum as regulators tighten rules on programmed trading and their models face unfavorable conditions, according to Sinolink Securities Co.

Quants’ stock products lost an average 4.9% in the first quarter, bigger than a 0.9% loss among discretionary rivals, according to the Citic Securities report, published earlier this month. The asset decline disrupted a slow but stable recovery that started in late 2022 from a deep market downturn earlier that year.

The broader hedge fund industry shrank by almost 200 billion yuan last quarter to 5.3 trillion yuan. An average 0.8% loss weighed on asset value and clients pulled out a net 140 billion yuan, according to Citic Securities estimates.

While the market has since rebounded, quant funds still mostly underperformed the stock indexes in April. The strategy seeking to beat the CSI 500 Index lagged the gauge by 1 percentage point, according to a May 22 report by Sinolink Securities.

Factors like momentum, growth and sentiment — which quant models rely on to capture returns — remained highly unstable in April, analysts led by Yu Jing wrote.

The number of hedge funds running at least 10 billion yuan each shrank to 92 as of May 25, from 100 at the end of March, with three quants falling out of the top league, the Shanghai Securities News reported, citing data compiled by Shenzhen PaiPaiWang Investment & Management Co.

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