Traders work on the trading floor of the Hong Kong Stock Exchange, in Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)

This Quant Wants to Beat China’s 147 Million Retail Traders

(Bloomberg) -- Wall Street veteran Zhou Ping is confident his sophisticated formulas will win against the world’s largest army of day traders.

This Quant Wants to Beat China’s 147 Million Retail Traders

Ping, who moved to Shanghai with Neuberger Berman Group last July, has tweaked those models to focus on market timing and avoid stocks that retail investors tend to favor. The 45-year-old will oversee a yuan-denominated equity fund that the $315 billion U.S. investment manager plans to launch this year, betting that China’s ripe for quantitative strategies because of its dizzying swings.

Critics say the country’s equity market is highly speculative and dominated by short-term investors. Average daily turnover is high, reaching a record 2.4 trillion yuan ($355 billion) at the height of the meltup in 2015. That’s dropped to about 300 billion yuan -- near the lowest in four years -- after stocks lost more than $2 trillion in value last year alone, data compiled by Bloomberg show.

There are about 147 million mom-and-pop traders in China -- equivalent to Russia’s entire population -- clearing house data show. Some of them buy stocks just because they sound right, piling into companies with “king” and “emperor” in their names after President Xi Jinping’s move to stay in power indefinitely. A stock that in Chinese sounds like “Trump Wins Big” jumped after the 2016 election, while one that sounds like “Aunt Hillary” slumped.

This Quant Wants to Beat China’s 147 Million Retail Traders

Neuberger’s quant fund will focus on A shares and will be marketed to China’s high-net-worth individuals, the company said, without disclosing whether it has a target size for the fund. The hope is that a disciplined quantitative approach to trading China shares can cut through some of the speculative impulses that often drive the market.

Private quant funds did outperform last year, posting an average return of 3.6 percent in China compared to a 25 percent slump in the Shanghai Composite Index, figures from Shenzhen PaiPaiWang Investment & Management Co. show. Equity mandates generally lost 16 percent, according to the data, which analyzed more than 5,800 funds.

“There’s a higher chance that professionals can reap higher returns in China,” Ping said. “Quant funds’ returns are on a whole different level here.”

Some investors have been encouraged by signs that China’s equity market is maturing: intraday swings are lower and companies with attractive dividends, profit revisions and earnings yields have outperformed. Institutional money managers, who tend to have a longer holding period, are getting more involved and the country continues to roll out measures to lure foreigners, who still own just a tiny slice of the market.

MSCI Inc. is considering significantly increasing the weight of China A shares in its global benchmarks this year. The index provider is seeking feedback on its proposal by mid-February and will announce its final decision at the end of that month. Rival FTSE Russell said it will add the shares in three stages from June.

China is considering restarting trading channels that will allow quant funds to place orders more quickly, according to a China Securities Journal report Thursday. They’ve been closed off since 2015 after being blamed for exacerbating the market rout.

Neuberger Berman employs about two dozen people in China after getting its first license in 2016. Ping says the country’s equity market will be more efficient when more mutual funds are allowed to operate there and as foreign asset managers get better access.

For now, he’ll take a shot at exploiting those inefficiencies to beat China’s day traders at their own game.

“It’s difficult to be a long term investor,” Ping said. “Even a pension fund on Wall Street might give up on the idea after a decade here.”

©2019 Bloomberg L.P.