(July 20): China’s quantitative hedge funds saw some of their steepest drawdowns last week as a local market rout deepened following the global selloff in chip stocks.
A similar fund at HanTak Investment Management lost an estimated 16.1%, cutting its year-to-date excess return to 7.1 percentage points, while its strategy tracking the CSI 500 Index dropped 14.3%, according to the data. The Beijing-based firm manages more than five billion yuan.
The sharp drawdowns highlight the impact of the wild swings in artificial intelligence-related stocks, which surged earlier this year before plunging recently as worries of a bubble intensified. Chinese quants’ average excess return shrank more than 10 percentage points from a year earlier to only 3.5% in the first half as AI stocks’ sharp rally made it difficult for diversified portfolios to outperform the market, according to Shenzhen PaiPaiWang Investment & Management Co, which tracks hedge funds.
“This was an extreme market environment faced by the entire industry,” HanTak wrote in an investor letter seen by Bloomberg.
The CSI 1000 Index of small-cap Chinese stocks fell more than 12% last week, the most since a selloff that hit quants in February 2024. The gauge was down more than 4% on Monday afternoon, even as the benchmark CSI 300 Index gained.
Before last week’s tumble, High-Flyer’s CSI 1000 Quant Multi-Strategy No. 1 had beaten the benchmark by an annualised 24 percentage points since inception almost eight years ago, according to PaiPaiWang.
HanTak declined to comment beyond its investor letter. High-Flyer didn’t immediately reply to a message seeking comment.
HanTak attributed last week’s drawdown to a sharp reversal in market trends since June 29, as the high-momentum growth stocks that had led gains in the first half of the year were suddenly sold off. The slump in overseas technology shares quickly spread through the global tech supply chain, while falling margin-financing balances in China, concerns over liquidity being drained by large IPOs, and a broader deleveraging added to risk aversion.
The selloff was amplified by an unusual convergence of factors that quants’ computer models use, HanTak said. Factors that had previously offset one another — including momentum, liquidity and short-term reversal — moved lower at the same time, creating a rare headwind for quantitative strategies. Market volatility was also about 50% higher than last year, magnifying the impact on portfolios.
More than 10 Chinese hedge funds, including quants and discretionary managers, have announced plans this year to subscribe to their own products with proprietary money to boost investor confidence, with the pace accelerating this month. Ningbo Lingjun Investment Management Partnership pledged 200 million yuan on Sunday, while Ningbo Alpha2Fund Investment Management Partnership Enterprise committed half of that amount on the same day, according to separate company statements.
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