Alibaba-Backed Robo Adviser Seeks to Tame China Day Traders
Kelvin Lei and Don Huang spent several months huddled in a corner of a Hong Kong university library, but they weren’t cramming for any exam. Back in 2015, the former DBS Bank Ltd. colleagues were looking to launch their robo-advisory startup and wanted to scrimp on office costs.
“We were in the library for nine months,” Lei said in an interview from Hong Kong. “We didn’t have any money.”
Today, the robo-services company they developed has more than 130 employees. Aqumon helps people build portfolios of global assets using data science and artificial intelligence. The startup is seeking to raise around $50 million in a Series B financing round this year from investors including banks, venture-capital firms and even sovereign funds.
The firm, which offers its services through an app and also via financial institutions, is aiming for an initial public offering in Hong Kong that will value it at at least $1 billion within three to five years, said Lei, the chief executive officer of Magnum Research Ltd., the company behind Aqumon.
The entrepreneurs are also planning to further expand beyond Hong Kong into the vast but potentially challenging mainland Chinese market, where automated financial services are still in their infancy. There are no major independent robo advisers in China, according to Z-Ben Advisors Ltd., a Shanghai-based consultancy that tracks China’s asset-management industry. About 15 fund companies, banks and brokerages, and a handful of fintech firms including Ant Group Co., offer the services, it says.
Vanguard Group has abandoned plans to seek a mutual fund license in China and will instead focus on building out the robo-adviser platform that it rolled out with Ant last year, it said in a statement.
Aqumon’s model of offering longer-term investment strategies tailored to different levels of risk tolerance aligns with the Chinese government’s goals, Lei said. They include avoiding the kind of frenetic trading that led to boom-and-bust cycles like the one in 2015. The app doesn’t provide margin loans.
It remains to be seen whether Aqumon’s offering would appeal to Chinese investors. They’ve tended to focus on short-term returns, preferring to trade for themselves based on information gained from media reports, research notes, stock websites and social media rather than entrusting money to professional advisers. Trading accounts held by Chinese individuals reached more than 181 million as of February, more than 99% of all accounts, according to China Securities Depository and Clearing Corp.
At the same time, the fate of robo-advisers in the U.S. and Europe sounds a warning. Many services struggled after being all the rage among Wall Street banks just several years earlier. UBS Group AG shut down its SmartWealth robo adviser in 2018, while Investec Plc closed its service a year later. Like other big players, UBS now offers a robo-human hybrid service.
Those that have tasted success include Betterment in the U.S., which has about $21 billion in assets under management, according to its website. Those with the biggest user bases, like Intuit Inc.’s budget tracker and planner Mint, often focus on general education rather than investment advice.
China’s crackdown on the fintech industry is another potential headwind. Regulators have been clamping down on smaller companies to reduce financial risk as well as larger ones like Jack Ma’s Ant.
Still, Lei said recent talks with regulators in Hong Kong and China have left him feeling optimistic. Aqumon has applied for a fund investment advisory license to operate in China, he said. It plans to increase the number of employees to 200 by the end of 2022, while opening a Shanghai office this month and a Beijing one later this year.
The company -- which Lei refers to as “Quant Monster” after Japanese media franchise Pokemon, which is short for Pocket Monsters -- will cater to China’s general public rather than just the wealthiest individuals, he said. It’s particularly targeting people aged 25 to 40.
Nicole Wong, a lawyer in Hong Kong, downloaded the app in January. After assessing her risk level as moderate, it recommended five equity exchange-traded funds and three bond ETFs. Her portfolio rose as much as 5% before fluctuating amid the recent market volatility.
“They provided a gateway for people to jump on the investment train,” Wong said. “They simplified something that could be quite complicated for the general public.”
Aqumon, which counts the Alibaba Entrepreneurs Fund as one of its largest shareholders, charges advisory fees on client assets, usually from 0.4% to 0.8%, and commissions on securities trading.
In the short term, the biggest challenge is getting the license, Lei said. “But in the longer term it’s still client education,” he said. “They need to learn about asset allocation, passive investment and they need to raise their tolerance of volatility.”
The global stock market surge last year sent many first-time traders flocking to apps operated by Futu Holdings Ltd., Up Fintech Holding Ltd. and Webull Financial, created by Alibaba Group Holding Ltd. alumnus Wang Anquan.
But investors may shift away from active equity strategies in the turbulent market this year, leaving an opportunity for robo advisers, said Ivan Shi, head of research at Z-Ben. The CSI 300 Index’s recent slump, dragged down by losses for once-high-flying stocks like Kweichow Moutai Co., has taken the benchmark gauge down more than 12% from a February high.
“People are not really able to tell if a robo-advisory portfolio has any long-term benefits,” he said. “If this year we see continued or larger volatility in the market, then different types of robo-advisory portfolios can probably deliver better returns.”
But Shi noted that robo advisers underperformed active equity strategies last year in a pilot program by the China Securities Regulatory Commission.
Still, Lei says Aqumon aims to increase its assets under management to 1 trillion yuan ($154 billion) over the next three to five years. The company declined to provide its current AUM, saying it’s sensitive information for a startup. The market for robo advisers in China could have over $660 billion in assets under management next year from more than 100 million users, Accenture Plc estimated in a report.
It’s the ideal timing for us to “promote our best strategies to investors in China,” Lei said. The regulators “want to make the market become more healthy and more regulated. I think we’re in a very good position.”
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