China hedge funds flail in ‘quant quake’ as Beijing promises new rules

One manager described it as the industry’s “biggest black swan event.” Another said its models “switched from doing it right to getting it wrong repeatedly.”

While historical data on China quant returns is limited, all signs point to record underperformance for such funds—a shock that Man Group has compared with the “quant quake” that wreaked havoc on US managers in 2007.

Leading quants each managing more than 10 billion yuan ($1.4 billion) lagged the CSI 500 Index by an average 12 percentage points in the two weeks ended Feb. 8 for the strategy tracking the stock gauge, bringing the year-to-date excess return to a negative 11.3%, according to industry data cited in a Huatai Securities Co. report.

After defying the nation’s stock slump in the past three years, quants were caught off guard by rapid market shifts and government intervention in the lead-up to the Lunar New Year holiday. 

A week meant for national celebrations turned into “one sleepless night after another” for quants and their investors, Shanghai-based Hainan Semimartingale Private Fund Management LP wrote in a Feb. 8 letter seen by Bloomberg that also described the episode as a black swan event.

The debacle highlights how quants’ efforts to woo clients—this time by quietly adding better-performing smaller stocks in portfolios tracking benchmarks to boost returns—could backfire when going too far. While many of the managers expect their returns to improve as the market swings normalize, the industry is also facing its toughest-ever regulatory scrutiny and weaker players may struggle to recover.

“That was the first ever liquidity crisis triggered by a stampede from crowded quant strategies in China,” said Li Minghong, a fund-of hedge-funds manager at Beijing Yikun…