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QINGDAO TODAY
在线翻译:
szdaily -> Markets -> 
Fund managers eye end to high-speed trading hiatus
    2019-02-14  08:53    Shenzhen Daily

CHINA’S data-driven “flash boys” – hedge fund managers who for years have been handicapped by government curbs on tools to short-sell stocks – are dusting off high-speed trading products as the government revives the country’s financial derivatives market.

China’s financial futures exchange last month relaxed trading rules on stock index futures and vowed to boost liquidity of that market, while the country’s two stock exchanges said they aimed to launch new stock index option products this year.

That is music to the ears of a breed of fund managers nicknamed “flash boys,” whose quantitative strategies rely on historical data, algorithms and derivatives to profit from short-term price movements, sometimes within a second.

Such techniques differ from conventional strategies, in which portfolio managers make bets based on their views of a company or market.

“The widespread usage of derivatives will make returns more stable ... increase liquidity, and new strategies may emerge,” said Wang Feng, a former Wall Street trader and co-founder of Alpha Squared Capital, a Hangzhou-based hedge fund. “The industry will enter era 2.0. The most difficult time may have passed already.”

Derivatives could be deployed to insure against unexpected losses or simply to bet on shares to fall, a so-called short strategy. The latter function was blamed for exacerbating the equity rout of 2015 and 2016, leading to more stringent rules. That led to poorer liquidity in such instruments and ultimately higher costs for hedge funds, sharply reducing their popularity.

Shen Yi, a former Goldman Sachs trader who set up his own fund house in Shanghai, saw his assets under management halve from a pinnacle of US$1.6 billion around 2015 as government curbs on index futures trading bit.

“In the last two years, you see quant funds shrink and shrink and shrink,” he said. But with the rule relaxation, “I would say we will go back to the peak time very soon.”

A liquid derivatives market is particularly essential to many quantitative trading strategies. In “market neutral” strategies, for instance, investors match long and short positions in different stocks, seeking to profit from stock selections while maintaining constant, steady returns regardless of whether the overall market is rising or falling.

In China, where shorting individual stocks is highly restricted, hedge funds instead use stock index futures to build short positions.

“The next two to three years will be a bull market for quant funds. We’re getting ready for that,” said Chen Bin, founding partner of quant fund manager SHQX Asset Management in Shanghai, who increased headcount by a quarter last year to 40 in expectation of business expansion.

The derivatives defrost is good news even for mutual fund managers, who typically focus on long-only products that bet on rising prices.

“A broadened derivatives market gives fund companies more choices in designing fund products,” said Fang Weili, deputy CEO of Huatai-PineBridge Investments in Shanghai.

There were 8,966 private securities investment fund managers in China as of November 2018, commanding 2.26 trillion yuan (US$331.05 billion), according to data published by the Asset Management Association of China.

Amid the Sino-U.S. trade war and softer domestic economic growth, the Chinese stock market shed a quarter of its value last year.

Due to excessive hedging costs, many hedge funds were forced to diversify into long-only quant strategies, which gave them little shield against the market downturn. (SD-Agencies)

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