SHANGHAI (Reuters) – Regulators have begun scrutinizing some hedge funds and brokers over quantitative trading strategies as China’s stock market struggles to recover, fueling concerns about falling share prices and a sector that could benefit from volatility, sources said. The China Securities Regulatory Commission (CSRC) has checked with several major brokers in recent weeks about short-selling activities and the trading strategies of their clients — funds that trade quickly using derivatives and data-driven computer models, two people with direct knowledge said. Separately, the Shanghai and Shenzhen stock exchanges, under the leadership of the CSRC, have sought information from major mutual funds on their fundraising strategies, another source said. “They want to know the logic of the trade, the source of profit, in which case you hold net long or net short positions … and the reason for buy and sell orders,” the source said.
The sources did not want to be named because they are not authorized to speak to the media. The CSRC and its boards did not respond to requests for comment.
Global quant fund houses including Winton and Two Sigma have operations in China, but it is unclear whether foreign players are being investigated.
The latest regulatory crackdown comes after a number of market-friendly measures – including stamp duty cuts – have failed to make a sustained rally in a struggling market that is up around 5% year-on-year.
The weakness has sparked finger-wagging on social media, as well as criticism from fund managers and retail investors of these quantitative funds and short sellers.
The CSRC pledged earlier this month to increase scrutiny of program trading, and some fresh investigations into short-selling and some financing activities could lead to tighter rules on hedge funds. The regulatory review is not unconditional. In the year In the 2015 market crash in China, Beijing nearly shut down the index futures market and blamed short sellers for the turmoil. PROBE Quant funds in China exceeded 1.08 trillion yuan ($147.94 billion) by the end of 2021, doubling from a year ago, according to a report compiled by institutions including Huatai Securities. Among China’s largest quantitative funds are high-flyer Quant Investments, Yanfu Investments LLC and Shanghai Minghong Investment Management Co.
A better understanding of the various quantitative strategies could help curb the regulators that contribute to market volatility, said one of the brokerage’s sources. Short-selling activities can also be held in Kunt funds, he said.
“Brokers in China are more willing to lend securities to numbers because of active trading and commission contribution. But it’s not fair for other market players who can’t get collateral loans,” said Yuan Yue, manager of Water Art Asset Management Fund. .
The regulatory inquiry is at an early stage and no conclusion has been reached, according to three sources.
Rich betting regulators have requested information on Direct Market Access (DMA), sources said. Through the DMA, hedge funds in China can borrow money from brokers to fund leveraged bets. Borrowing $1 only requires a minimum deposit of 25 cents. “The DMA will easily raise eyebrows as it involves high leverage and will allow quant funds to make more money,” said a brokerage source. Another brokerage source asked CSRC to clarify the number of their clients and how quantitative trading affected the recent stock market. Yang Tinggu, deputy general manager of asset manager Tongheng Investments, supports strict rules for quant funds, saying many Chinese quants make lucrative bets on weakly regulated companies rather than fundamentals. The quant strategy is a neutral tool, but it is “used to provide liquidity to the bad guys in China,” he said, referring to poorly managed firms in China.
($1 = 7.3002 Chinese Yuan Renminbi)
(Reporting by Shanghai Newsroom; Editing by Sri Navaratnam)
