By Samuel Shen and Summer Zhen
SHANGHAI/HONG KONG (Reuters) – China’s data-driven quantitative trading funds are expanding rapidly overseas as competition heats up at home and regulators tighten scrutiny of the $260 billion sector.
Meridian & Saturn Capital (MS Capital), with offices in Shanghai and Singapore, said it is starting to offer its China strategy to offshore investors and is also preparing to invest in global markets.
DH Fund Management created its first offshore fund in March, according to a public filing, and Beijing-based Ubiquant plans to open a U.S. office, a source familiar with the matter said on condition of anonymity. DH Fund and Ubiquant declined to comment.
Chinese quantitative hedge funds have ventured into overseas markets for years, but their expansion has accelerated as the sector has become increasingly crowded at home and regulators tighten oversight of an industry capable of profiting from market volatility.
Many Chinese funds want to gain exposure to European and U.S. investors, and also need to build offshore structures, since “they can’t just trade China forever,” said Alvin Fan, CEO of hedge fund platform OP Investment Management.
Fan and some other fund executives launched the Chinese Overseas Private Funds Association last week in Hong Kong, an industry body to help Chinese fund managers expand globally and collectively express their concerns to politicians.
Filippo Shen, chief representative for China of Dutch asset manager Privium Fund Management (HK), said a growing number of funds are not just raising funds abroad, but also investing abroad.
“Under current compliance rules in China, some quantitative strategies do not work or cannot provide the best performance domestically,” said Shen, who helps Chinese funds build global brands.
“So some quant funds are setting up their second investment hub, in Hong Kong or Singapore, where their strategies could work better and operate more freely.”
This also means head-to-head competition in offshore markets with global giants such as UK-based quant fund managers Winton and Man Group and US-based Two Sigma.
CAPTURE ‘ALPHA’
Earlier this month, Chinese securities regulators released draft rules aimed at strengthening oversight of the program and high-frequency trading.
Kate Zhang, partner and CEO of MS Capital, said China’s huge and relatively volatile market gives quant funds an advantage, allowing them to generate “alpha,” or market outperformance. Quantitative funds primarily use program trading, in which computer models place orders automatically and quickly capture small market fluctuations.
MS Capital offers investors a market-neutral strategy focused on China. The aim is to expand investments beyond China and launch global strategies later this year, initially targeting Asian markets such as Japan, India and Thailand, before making a foray into European and US markets.
Shanghai-based Minhong Investment also has big global ambitions, preparing strategies aimed at Japan and India, having already used its money to test the waters in the United States and South Korea.
Privium’s Shen said he is receiving more and more questions from Chinese fund managers about launching global strategies, and that he is in talks with a major Chinese fund looking to build a global brand.