Active quantitative investment in China A-share market is still in its early stage, which can leverage the market efficiency and generate positive alpha opportunities. One of the leading quantitative portfolio managers, Hanqing Tian, portfolio manager & CIO and Deputy General Manager of Huatai-Pinebridge Fund Management Co., Ltd. shared her views on the active quantitative strategies in China A-share market.
27 July 2020
When approaching the Chinese equity market, global investors are usually faced with the choice of active vs passive/rule-based strategies. Now there is a somewhat hybrid in China called “active quantitative strategies” which has proved to be a good alpha generator. This is a combination of rule-based quantitative approach with some active management elements.
ATC Initiative interviewed Hanqing Tian, portfolio manager &CIO and deputy general manager of Huatai-Pinebridge Fund Management Co., Ltd, who demonstrate the unique characteristics of China market and strongly argue for active quantitative investment.
“China A-share market is an untapped market (for quantitative investment), we should be able to generate pretty good alpha in the long run.
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Q: What is the stage of development for quantitative investment in China? What are the main quantitative strategies?
- The quantitative investment in China is still at a very early stage;
- The total AUM of quantitative investment accounts for 5.18% of the total active mutual funds. The total AUM of active quantitative funds is only about 1%-2% of the free-floating market cap of China A-share market;
- Two main quantitative models of active quantitative strategies: fundamental-based (including long-only and long-short) and algorithm-based;
- Mutual funds in China mainly use fundamental-based quantitative strategies:
- For long-only strategy, the benchmark index is normally CSI 300, CSI 500 and other Cross-border indexes.
- For a long-short strategy, using the index future to hedge the beta. However, securities lending is very expensive now;
- For private raised funds, the short-horizon strategy is dominating.
Q: What is the return level of the main quantitative strategies in China?
- For the long-only strategy, the information ratio is 1 time to 2 times depending on what risk you are taking;
- For the long-short strategy, the normal information ratio should be 1 or above 1 time, in some good years, it could be 2 times or above. The long-short strategy was not feasible until last year due to the market crash in 2015, when the index future was traded with discount;
- For the short-horizon strategy, some managers can achieve total return or absolute return from 10% to 30%. The smaller of the total AUM, the easier to get a higher return. Short horizon strategy has been performing very well since 2015, but this type of strategy may be quite crowded now.
Q: Compared with the developed equity market, what characteristics do you think to make China A-share market more suitable for quantitative investment?
- China A-share market is less efficient equity market compared with developed markets. There are very good alpha opportunities for quantitative strategies;
- The China A-share market is still a retail-driven market, about 70% of the trading volume is generated by retail investors;
- For institutional investors, quantitative strategies account for a small proportion and not very crowded yet;
- The quality of data is very high and the breadth for quantitative strategies is very good. The higher the breadth, the better the alpha you could have;
- China A-share market is a relatively untapped market for quantitative investment; very good alpha can be generated in the long run.
Q: In terms of factor selection, which factors do you think are more effective in emerging markets, especially China’s A-share market?
- For fundamental-based quantitative strategies, almost all the alpha factors are working well;
- Growth-related factors are normally performing better in the emerging market;
- Momentum and market-related factors are also performing very well in China A-share market;
- Valuation factors are volatile.
Q: How do you manage the risk in your quantitative strategies?
- Risk management is the advantage and key part of quantitative strategies;
- We do risk management with two layers: investment risk control and operational and compliance risk control;
- For investment risk control:
- The beta risk will be fully taken by investors, except in some cases when the beta risk will be hedged completely when investors don’t want to take the market risk;
- For Alpha risk, normally we do ex-ante risk control, alpha risk will be controlled in two steps:
- Neutralize alpha factors to make them uncorrelated with the risk factors in order to get a pure alpha;
- Control the target risk;
- For operational and compliance risk control, we build in all the rules into the system, only portfolios on the trading list can pass through the internal system.
Q: Why do you think global investors should consider quantitative funds in China?
- China A-share market is a less efficient market with very rich Alpha opportunities;
- Among all the active strategies, active quantitative is less crowded;
- For our fundamental-based quantitative strategy, we tend to be market neutral for the alpha part, sector-neutral and size neutral. The investors can get a more transparent return and risk exposure;
- Over the long run, we will deliver more stable long-term performance for the investors.
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