China’s Top Quant Hedge Fund High-Flyer Apologizes for Loss

(Bloomberg) -- China’s top quant hedge fund apologized to investors after a record slump in performance, highlighting challenges facing the industry following a period of breakneck growth.

The recent drawdown, caused in part by mistimed trades, was the biggest in the firm’s history, Zhejiang High-Flyer Asset Management said in a statement late Tuesday on its Wechat account. The investment manager didn’t give a number for the decline.

“We feel deeply guilty,” the Hangzhou-based firm wrote. High-Flyer managed about 90 billion yuan ($14.1 billion) as of September, making it the largest quant hedge fund in China. Assets have since dropped notably, a company representative said without giving an exact figure. While the majority of its clients still made money this year, some have seen losses on paper and returns “failed” relative to the index, according to the statement.

High-Flyer’s stumble is the latest sign that China’s quant hedge funds are slowing down as regulatory scrutiny intensifies and some of the $219 billion industry’s most popular trades become increasingly crowded. A growing number of players are now restricting inflows or dialing back expansion plans, after a boom that saw assets under management at algorithm-driven funds jump by fivefold over the past two years.

High-Flyer said its artificial intelligence didn’t time trades well even though the selection of stocks was fine in terms of long-term value. The models are inclined to take on more risk to seek higher returns when markets shift wildly, which deepened declines, according to the statement.

The company said computer-driven trading firms have expanded their assets too quickly, leading to similar trading strategies that make operations more difficult. High-Flyer is adjusting its models, controlling its size and lowering the concentration of stock positions, it said.

Returns from so-called enhanced index products, a popular segment of quant funds in China, have dropped since mid-September and turned into losses, according to a report by analysts at China Merchants Securities Co. published Nov. 16. They saw a “significant” negative correlation between assets under management and excess returns. Assets managed by private quant firms jumped 60% this year through Sept. 30, according to Citic Securities Co. estimates.

High-Flyer’s CSI 500 Multi-Strategy No. 1 fund fell 13% in the three months through Dec. 24, according to data compiled by Shanghai Suntime Information Technology Co., compared to the index’s 1% decline during the period. The smallcap stock gauge retreated from the year’s peak in mid-September as markets were buffeted by the fallout from the debt crisis at property developer China Evergrande Group, wide-ranging regulatory curbs on the private sector, and signs of a slowing economy. 

The hedge fund last month stopped taking new money and shortly afterward said it will scrap redemption fees for its yuan funds to help investors adjust their allocations. The firm is temporarily reducing its assets under management to better adapt to what it sees as a complex market environment for quant strategies in the coming period, a representative said at the time.

Shanghai Minghong Investment Management, another of China’s biggest quants, came under pressure earlier this year after losses led to the largest redemptions in its history. Assets have since rebounded by about 10 billion yuan to 65 billion yuan as returns improved after the company adjusted its models, according to founder Qiu Huiming. The fund’s product tracking small-cap stocks gained about 63% this year through Nov. 30, topping the list among long-only strategies at quant funds, according to data compiled by wealth management firm Licai.com.

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With assistance from Bloomberg