(Bloomberg) — A Chinese hedge fund founded by a Two Sigma Investments LP alumnus is emerging as one of the biggest winners from this year’s shakeup of the 1.6 trillion yuan ($220 billion) industry.
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Thanks to its outperformance during what Man Group called a “Quant Quake” in February, Shanghai-based Yanfu Investments LLC is leading a recovery to generate index-beating returns and lure talent. Run by former Two Sigma researcher Gao Kang, the firm catapulted to the top four quant funds in China for the first time, with 56 billion yuan of assets under management as of late April.
The fallout from the turmoil is changing the landscape for quantitative hedge funds, as regulators tighten scrutiny on programmed trading and clients reassess the effectiveness of the firms’ algorithm-based strategies. Scale is critical with new rules lifting the asset threshold, while regulators weigh restrictions that could cut off banks as a major distribution channel for hedge funds.
“The meltdown in February showed who was swimming naked,” said Yin Tianyuan, head of research at Shanghai Suntime Information Technology Co. “The industry will struggle to grow assets this year.”
Competitors who left their trading models alone also rebounded. Pinestone Asset Management Co. and Shanghai Manfeng Asset Management Co. have more than doubled their assets since the meltdown in an otherwise difficult fundraising market.
But many others are struggling. Shanghai Wenbo Investment Management Co.’s assets slumped after regulators cracked down on a star strategy. Ningbo Lingjun Investment Management Partnership saw a “slight” outflow after some investors pulled their money following trading restrictions imposed by exchanges, the company said.
Lingjun, which had some accounts frozen by regulators for three days in February, saw new subscriptions suspended at Ping An Bank Co., hampering inflows, according to people familiar with the matter. The company’s assets have stayed above 50 billion yuan, according to a representative who requested not to be named. Ping An Bank declined to comment.
The industry bar for survival has become much higher. Regulators imposed a 5 million yuan minimum requirement for a hedge fund product to sustain operations, a level challenging to meet for about 37% of existing products, according to data from Shanghai Suntime last year.
Quants’ combined assets dropped 4% as of the end of March in China, the first shrinkage since late 2022, according to Citic Securities Co. estimates. Many quant firms saw unprecedented drawdowns in early February when their favorite small-cap stocks crashed, dragging down their returns.
DMA Products Dwindle
The setback is especially severe at the epicenter — highly-leveraged so-called Direct Market Access products. Shanghai Wenbo, which leveraged DMA products to double its assets to 35 billion yuan last year, has since slumped to little more than 20 billion yuan, according to a person familiar with the matter.
The size of its DMA products has meanwhile plunged to less than 5 billion yuan from more than 10 billion yuan, the person said, requesting not to be named because the matter is private. Wenbo chose to enforce the new rules more strictly and terminated some maturing products even though they were allowed to be extended, worsening the shrinkage, the person added.
Regulators have since told funds to phase out DMA products sold to external investors, and capped leverage on any such business at 100% in new rules released in April, down from as much as 300% previously.
“The industry is going through a supply-side reform,” Yin said. “At least some managers will see product liquidations and asset shrinkage.”
Big Funds Benefiting
The downturn however has emerged as an opportunity for companies like Yanfu.
The firm’s index-enhanced product tracking the CSI 500 Index has beaten the gauge by 4.8 percentage points this year through June 7. Similar offerings by Shanghai Minghong Investment Management Co. and Starvast Quant recorded excess returns of 5.2% and 4% respectively, according to data compiled by China Merchants Securities Co.
To tap the momentum, Yanfu launched a new index-enhanced product tracking the broader CSI All-Share Index, soothing investor worries over concentration in small caps.
Yanfu told investors in April that its strategies are now capable of managing 140 billion yuan of assets, more than double its current size, according to people familiar with the matter.
The firm also expanded the number of summer interns for 2024, while expediting the vetting process from one month to just a week to speed up hiring. Yanfu declined to comment or disclose details on its fundraising and hiring progress.
Zhejiang High-Flyer Asset Management and Ubiquant said their assets under management have stayed largely stable this year at levels close to 60 billion yuan. Minghong said its assets have also been little changed this year at about 50 billion yuan. The three plus Lingjun have dominated rankings by assets in recent years.
Pinestone, which capped the drawdown in its DMA product at 9% to avoid forced selling, automatically reduced leverage before the selloff deepened. The company has more than doubled assets since February to 8.5 billion yuan, drawing new inflows from mostly institutional investors into all product lines, the company said. Its index-enhanced strategy was leading the CSI 500 by 8.6 percentage points this year as of June 7.
Manfeng doubled its assets in quant products since January to 150 million yuan.
“Our performance in February certainly helped,” Chief Investment Officer Edward Liu said.
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