Quant ‘wolves’ chart path to China

One scoop to start: Ministers are looking to relax rules shielding tens of millions of UK retirement savers from high charges as the government steps up efforts to funnel pension fund cash into its “levelling up” agenda. But investors have warned that chancellor Rishi Sunak’s bid to increase investment into UK infrastructure and tech companies risks benefiting financiers rather than savers or the wider economy.

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‘The wolves are arriving’: foreign quants target China

Six years after a stock market implosion drove Beijing to pin blame on “malicious” short-selling by foreign funds engaged in algorithmic trading, the biggest names in quantitative investing are flocking to China once more. The latest to do so is the undisputed top dog of the computer-driven investment industry, report my colleagues Hudson Lockett and Tabby Kinder in Hong Kong and Laurence Fletcher in London.

The application for direct access to Chinese markets by DE Shaw, the secretive and wildly successful quant fund founded by computer scientist David Shaw in the late 1980s, spurred headlines in the country’s financial press proclaiming that “another quant titan” was investing in China.

“Another” is the key word here. Fund managers and prime brokers in the region say quant interest in China has exploded this year, fuelled by the heavy trading of Chinese retail investors, which provides inefficiencies in the market for them to exploit. The massive number of Chinese retail traders has created a market that is “Reddit times one hundred,” quipped Christopher Lee, chief investment officer at Zentific Investment Management, a hedge fund with quantitative strategies.

Recent policy changes are also making quant strategies easier to run in China, with reforms late last year granting foreign investors access to derivatives including some futures and options, and removing guidelines forbidding speculative trade in financial futures.

But not everyone in the quant world is ready to go all-in. “The rush into China doesn’t reflect the market opportunity,” said the former head of one of Asia’s oldest quantitative equity hedge funds.

Shanghai and Shenzhen still forbid share borrowing — the central mechanism behind short-selling, which allows funds to bet against individual stocks. It was “curious”, he added, that “everyone knows there is no borrow and yet everyone is piling into China hedge funds”.

The push comes as a series of regulatory shocks have caught some investors in China off guard this year, underscoring the unpredictability of market-moving actions by Beijing. And tensions are already emerging between local players and newer arrivals. A story in the state-run Securities Times last month quoted unnamed local quants who described foreign competitors as “the wolves arriving”.

Analysts warn that if Chinese markets tank, the first heads to roll will be those of foreign algo traders. As one hedge fund founder warned: “In China you don’t want to be too cutting edge.”

Will the lockdown day traders stick around?

Kristine Licuanan lasted less than 24 hours as a day trader.

Locked down in London, the 37-year-old snapped up in January £200 of shares in video game retailer GameStop and cinema chain AMC, unloved stocks catapulted to record highs in a frenzy of speculative buying that convulsed the US stock market earlier this year.

“I couldn’t stomach the volatility,” Licuanan told my colleagues Joshua Oliver and Madison Darbyshire. She recalled the stress of checking her phone to track where the shares were trading, before selling them at a loss only hours after buying them.

Despite this rollercoaster ride, Licuanan says she has developed a monthly stockpicking habit that has persisted even as Covid-19 restrictions have eased. She is typical of the kind of profile that trading platforms such as Robinhood and ETrade in the US, or CMC Markets in London, are trying to cultivate.

“We’ll look back on this time as a revolution in the balance of power in investing, away from major institutions towards the everyday investor,” said Yoni Assia, chief executive eToro, an Israeli cryptocurrency and stock trading app.

The pressure is now on these trading platforms to ensure the historic surge in trading by retail investors can outlast the coronavirus crisis. They are hoping the underlying drivers of the self-directed investing boom — such as low rates and slicker tech — will combine with the buzz generated during Covid to deliver a lasting boost to the industry.

Chart of the week

A split has emerged this year between the performance of traditional asset managers and their more specialist rivals. Some of the UK’s most well-established listed groups, including M&G, Schroders, Abrdn and Jupiter have suffered weak or negative share price performance in 2021. In contrast, the share price of smaller, newer or more specialist fund managers such as Impax, Liontrust, Polar Capital and Man Group, have increased 50 per cent or more since January.

David McCann, an analyst at broker Numis, said the UK fund management sector “has never been more split in terms of valuations”. He added: “Future success in the asset management industry will be defined by having specialism or scale. In the UK listed space, we generally prefer specialist asset managers, since few, if any, UK listed companies have the potential to grow large enough to become genuine global scale players, where the main competition is essentially the passive managers.”

News round-up

BlackRock’s profits beat estimates but assets stall shy of $10tn (FT)

Hedge funds snap up uranium in bet on green energy shift (FT)

UK’s ex-chancellor Philip Hammond joins crypto start-up Copper (FT)

Hohn vs Odey: the hedge fund battle for the planet (FT Opinion)

Henry Kravis and George Roberts hand over transformed KKR (FT)

Credit Suisse angers Greensill investors with free services offer (FT)

Anger grows in Wales steel towns over pensions mis-selling (FT) (FT)

Australian pension fund considers crypto investment (FT)

Evergrande-exposed fund house Ashmore suffers fall in assets (FT)

Celsius investment shows ‘conviction’ in blockchain, says CDPQ (FT)

And finally

The Superblue immersive art experience has arrived in London with a temporary space on Burlington Arcade. Check out the installation by artist duo AA Murakami — the artists behind Studio Swine — where digital art collides with physical space in a multisensory experience.

The Banking Revolution, October 19-20 2021 | Digital Conference

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