SHANGHAI: China’s abrupt and ferocious stock market rally has slammed some of the country’s biggest hedge funds, forcing them to hastily cover short positions and take losses on their bets in the heavily regulated derivatives market.
Beijing X Asset Management, Techsharpe Quant (Beijing) Capital Management and Shenzhen Chengqi Funds are among the funds sideswiped when China’s struggling stocks recovered a quarter of their value in less than a week in late September, following a raft of stimulus measures.
Their losses stemmed from short positions in China’s stock index derivatives, which market-neutral fund strategies perforce use to hedge equity holdings.
Market euphoria as China showed serious intent to fix its ailing economy drove futures prices up sharply, causing losses on those positions that could not be offset by gains in cash holdings.
British hedge fund giant Winton’s trend-following strategy was also upended by China’s unexpected market reversal, forcing the firm to quickly unwind its bearish bets.
Regulators have clamped down on data-driven quant funds and tightened curbs on stock short-selling this year, rendering the market prone to wild swings, said Hu Bo, fund manager at Shanghai Professional Fund Management Co.
Hu said the drawdowns underscore the risk of relying too heavily on one strategy in China’s moody market.
“Every strategy tends to hit the wall after a period of outperformance,” Hu said. So, investors need to “embrace diversified investment strategies, and make more in-depth research.”
Beijing X, which manages more than 10 billion yuan (US$1.40 billion), recorded a drawdown – a peak-to-trough decline in value – of 5.6 per cent in its hedging strategy in late September, according to broker data. Techsharpe suffered a drawdown of 5.2 per cent, and Shenzhen Chengqi Funds 4.6 per cent.
An index tracking China’s “market neutral” strategies recorded a drawdown of 4.83 per cent during the
