China Hedge Fund Minghong Recovers After Record Redemptions

(Bloomberg) -- Shanghai Minghong Investment Management Co., China’s largest quant hedge fund until recently, said it stemmed losses after earlier losses led to the biggest redemptions in its seven-year history.

After dropping 27% in the first quarter, the offshore fund’s net asset value stayed largely unchanged this month through April 28, founder Qiu Huiming said in a phone interview from Shanghai. The improvement came after adjustments to its trading model last month, he added.

Minghong, which rose to the top of China’s quant hedge funds last year, has faced investor skepticism due to its under-performance earlier this year, prompting it to apologize to clients in March. The market shifted sharply this year, with last year’s top-performing companies like liquor makers and semi-conductor firms, known as “high-momentum” stocks to quant funds, slumping in February and March. It trapped a raft of star mutual fund managers including E Fund Management Co.’s Zhang Kun.

Caixin reported last week that Minghong’s redemptions since late last year had mounted to nearly 40 billion yuan ($6.2 billion), out of almost 110 billion yuan in assets under management.

Qiu dismissed the numbers, saying while redemptions have been at a record, they were less than 20% of its more than 70 billion yuan in assets at the peak last year, and the impact has been “controllable” because outflows weren’t concentrated in the same period of time and investment positions.

Its flagship offshore fund beat its benchmark by 0.7% this month through April 28, reversing an under-performance of 4.5% in the first quarter, Qiu said. The adjusted model helped improve such excess returns -- gains above its measure that combines the Shanghai Shenzhen CSI 300 and CSI Smallcap 500 indexes -- he said.

“Our excess returns have improved a lot and its volatility dropped significantly” across products, Qiu said, adding that the fund is now performing above average among top-tier Chinese rivals.

Minghong isn’t new to setbacks. Assets shrank by similar levels for short periods in 2016 and 2018, before rebounding to new highs and doubling last year, said Qiu, who worked for Millennium Management LLC and HAP Capital Advisors LLC before founding Minghong in 2014.

China’s top quant funds, which attract most of the inflow, face pressure to upgrade their models as a jump in asset growth strains their trading capacity, according to Citic Securities Co. Private quant firms’ combined assets under management more than tripled to an estimated 760 billion yuan as of the end of last year, according to reports from the brokerage.

Qiu attributed this year’s losses mostly to a “medium-level” exposure to so-called style risk factors such as growth and momentum in Minghong’s computer models, which previously brought an average extra 3 percentage point return over the past six years while enlarging its drawdowns by just 80 basis points. Such exposure had been closed almost entirely in the model adjustments, he said.

Minghong’s assets have fallen to a little above 60 billion yuan, and are no longer the largest among private quant firms, Qiu said. Redemptions have subsided, and any effort to rebuild scale will be made with caution, without sacrificing returns, he added.

“This was undeniably a small setback to us,” Qiu said. “But we believe our model is solid and will deliver good long-term returns to our investors.”

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With assistance from Bloomberg