China quant hedge funds rebound after July selloff

China’s quantitative hedge funds posted a sharp recovery in early August after steep losses in July, driven largely by index-enhancement strategies that outperformed their underlying benchmarks.

Data compiled by Shenzhen-based PaiPaiWang Investment & Management showed the average return across 692 index-enhancement products was 9.1% in the week through Aug. 7, 2.9 percentage points ahead of the average gain across the underlying stock indexes. The broader quant industry in China is valued at about RMB2.6 trillion ($387 billion).

Long-only quantitative funds fell sharply in July, with an average decline of about 16%. The bounce in early August was concentrated in smaller-cap stocks favoured by many systematic managers. The CSI 1000 rose about 10% in the first two weeks of August after a roughly 20% drop in July, while the CSI 300 gained about 2% following an 8% decline in July.

China Merchants Futures reported all seven index-enhancement strategies it tracks generated positive alpha in the week ended Aug. 14. Products linked to the CSI A500 and CSI 500 each outperformed their benchmarks by 1.2 percentage points in that week.

PaiPaiWang attributed the recovery to a technical rebound from oversold conditions, improved liquidity and the reappearance of quantitative signals based on price and trading-volume patterns. Systematic models that rely on those signals can move quickly when conditions normalise.

Fund-level results varied. An investor letter from Shanghai-based Mingshi Investment Management showed its all-market quantitative stock-selection strategy rose 16.6% in the first week of August and added 2.1% in the week through Aug. 14, bringing its year-to-date return to 25.4%. The letter said the strategy followed model signals during the selloff, which initially increased technology exposure and later rotated into other sectors.

Hangzhou-based Everon Quant recorded consistent excess returns across the CSI 300, CSI 500 and CSI 1000 during the rebound, outperforming the CSI 300 by 1.96 percentage points in the week. Shanghai-based Hainan Semimartingale Private Fund Management outperformed the CSI 500 by 2.4 percentage points in the same period, taking its year-to-date excess return against that index to 17 percentage points.

Despite the gains, recovery across the sector remained uneven. PaiPaiWang’s data showed fewer than 8% of long-only quant funds had fully recovered their average 16% July decline by Aug. 7. By comparison, 13.5% of hedge funds overall had recouped their July losses.