China’s CSI 300 index stock index has fallen nearly 9 per cent this year © Raul Ariano/Bloomberg

Computer-driven hedge funds are betting that China’s financial markets offer plenty of opportunities to make money, despite an exodus of foreign investors, rising US-China tensions and growing scrutiny by regulators.

China’s CSI 300 index stock index has fallen nearly 9 per cent this year, compared with a 19 per cent rise in the US S&P 500, amid concerns about Beijing’s lack of forceful policy support in response to a crisis in the property sector. Much of the foreign money that flowed into Chinese equities earlier this year has now left.

Nevertheless, some European quantitative funds are being drawn to China, eager to unleash their complex trading algorithms on markets that often do not move in line with the US.

London-based hedge fund firm Aspect, which manages roughly $8bn in assets, is setting up an office in Shanghai, according to a person with knowledge of the matter. It has already obtained a qualified foreign investor licence, which gives it access to additional Chinese futures contracts. The firm declined to comment.

Meanwhile, Paris-headquartered firm Metori, which manages about $700mn, is planning to launch a fund next year for western investors, which will exclusively trade Chinese assets.

“[Western investors] still perceive Chinese futures as a unique source of diversification,” said Metori CEO Nicolas Gaussel.

“We are very enthusiastic about China because of the low correlation of Chinese assets with everything else we have in our portfolio, providing diversification,” said Philippe Jordan, president of quant fund CFM, which manages $10bn in assets. It trades Chinese equities and commodities.

Tensions between the US and China over trade and the future of Taiwan have been a crucial factor in driving some foreign investors away from the Chinese market this year.

A Bank of America survey of Asia-specialist fund managers in October showed that 55 per cent of respondents were either waiting for more credible signs of improvement in the Chinese economy or are actively looking for opportunities elsewhere.

“I think the tensions are leading to reduced allocations [from US investors to China],” said the head of capital introductions at a large bank.

However, some quant executives argue that the withdrawal of other foreigners provides them with even more opportunities to profit, as it reduces the number of investors trying to exploit the same market trends and patterns.

An executive at one firm said that “if Chinese leaders were too open with the West” the extra profits that their fund could make “would vanish too quickly” because of the increased competition.

The bullishness among quant traders comes despite signs of increased regulatory scrutiny of the growing sector and disquiet among some retail investors who suspect that quants are profiting at their expense.

In September, the China Securities Regulatory Commission vowed to increase oversight of quantitative and other automated trading activities to mitigate the “increased risk of market volatility” that it said such trading strategies can lead to under certain circumstances. The regulator also issued guidance to the Shanghai and Shenzhen stock exchanges on how to monitor these trades.

Reuters reported this month that regulators were restricting some forms of leverage accessible to hedge funds through bespoke derivatives contracts.

“Short-term, it’s going to be a bit of a juggle,” said Kher Sheng Lee, co-head of Asia Pacific and deputy head of government affairs for hedge fund industry body the Alternative Investment Management Association.

Quant funds have meanwhile drawn criticism from domestic investors. In September, popular economist Ren Zeping called for the Chinese government to suspend the activities of quant funds because of their impact on retail traders and the wider market.

“Quantitative trading has become a large sickle to harvest a large number of small and weak retail investors, causing serious damage to the A-share market, and is very detrimental to the protection of investors,” he wrote on the Chinese blogging website Weibo.

Executives of quant firms operating in China say they are having to be very sensitive to the demands of local regulators, citing the $97mn fine given to market maker Citadel Securities in 2020.

Nevertheless, they cite a move by Chinese futures markets to become more welcoming to foreign investors and say that, despite recent scrutiny, regulators and policymakers are still broadly becoming more accepting of foreign hedge funds.

Exchanges in China last year announced that they would make additional futures and options contracts on assets such as soyabeans, white sugar and peanut kernels available to international investors holding a so-called qualified foreign investor licence.

“We’re starting to see regulators recognise that the hedge fund manager plays an important role in the market by providing better liquidity and reducing transaction costs,” said Melody Yang, partner at law firm Simmons & Simmons in Beijing.

This follows a new futures and derivatives law that passed in China last year, standardising the rules governing China’s futures markets across different exchanges. The law also brought greater legal certainty to situations where a counterparty defaults in a bespoke derivatives trade.

Yang added that regulation could be seen as a positive development. “If the regulators start to recognise the legality of something by officially regulating [it], that . . . can be quite a positive signal in China.”

The passing of the legislation was viewed as a significant moment for western managers operating in China, who had been pushing for greater legal certainty in derivatives markets for many years.

“There has absolutely been more permissive legislation . . . China is opening up,” said the CEO of a multibillion-dollar quantitative fund trading in the country. “Any new market that opens and that has capacity is hugely important to large firms desperate to deploy cash.”

Copyright The Financial Times Limited 2024. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article