China’s quantitative hedge funds experienced a decrease in assets last quarter for the first time since late 2022. The drop in assets was a result of the stock-market meltdown in China, which impacted the performance of these funds and eroded investor confidence in their algorithm-driven trading strategies.
According to estimates by Citic Securities Co., the combined assets under management of quants in China fell to 1.57 trillion yuan ($217 billion) as of March 31, representing a 4% decline from the end of last year. This decline marks the first decrease in assets since the third quarter of 2022, as reported by China’s largest securities brokerage, which regularly compiles industry reports on a quarterly basis.
In February, many Chinese quant funds experienced unprecedented drawdowns, particularly due to the crash of their favored small-cap stocks. Managers are currently facing challenges in regaining momentum as regulators tighten rules on programmed trading and their models encounter unfavorable market conditions, according to Sinolink Securities Co.
According to a report by Citic Securities, stock products managed by quants experienced an average loss of 4.9% in the first quarter, significantly higher than the 0.9% loss observed among discretionary rivals. This decline in assets disrupted a slow but steady recovery that began in late 2022 after a severe market downturn earlier that year.
The hedge fund industry as a whole contracted by nearly 200 billion yuan in the last quarter, bringing the total assets to 5.3 trillion yuan. Citic Securities estimates that an average loss of 0.8% contributed to the decline in asset value, and clients withdrew a net amount of 140 billion yuan.
Although the market has rebounded since then, quant funds continue to underperform compared to stock indexes in April. According to a report by Sinolink Securities on May 22, the strategy employed by quant funds to outperform the CSI 500 Index lagged behind the benchmark by 1 percentage point.
Analysts, led by Yu Jing, highlighted that factors such as momentum, growth, and sentiment, which are crucial for quant models to generate returns, remained highly volatile in April.
According to data compiled by Shenzhen PaiPaiWang Investment & Management Co., the number of hedge funds managing at least 10 billion yuan each has decreased from 100 at the end of March to 92 as of May 25. The Shanghai Securities News reported that three quants have dropped out of the top league.