China probes quant strategies amid market worries and public anger – sources

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Regulators in China are investigating hedge funds and brokerages that use quantitative trading strategies. These strategies involve rapid trading using computer models and data-driven approaches. The China Securities Regulatory Commission (CSRC) has been looking into short-selling activities and trading strategies of these quantitative clients. Additionally, the Shanghai and Shenzhen stock exchanges, under the guidance of the CSRC, have requested information from major quant funds about their strategies.

The regulators are interested in understanding the logic behind these trading strategies, the source of profits, whether they hold net long or net short positions, and the reasons behind buy and sell orders.

Quantitative funds in China have grown significantly, reaching over 1.08 trillion yuan ($147.94 billion) by the end of 2021, nearly doubling in size from the previous year. Some of the major quant funds in China include High-Flyer Quant Investment, Yanfu Investments LLC, and Shanghai Minghong Investment Management Co.

The regulatory scrutiny has arisen amid concerns about market volatility and criticism from fund managers and retail investors regarding these quant funds and short sellers. Regulators may consider tighter regulations on short-selling and certain financing activities by hedge funds as a result of these probes.

While the inquiry is in its early stages and no conclusions have been reached, regulators are also interested in data related to Direct Market Access (DMA), which allows hedge funds to borrow money from brokerages for leveraged bets. DMA involves high leverage and can lead to significant profits for quant funds.

Some market participants support tighter rules for quant funds, arguing that some Chinese quant funds make profitable bets based on momentum signals rather than fundamental analysis, potentially benefiting poorly managed companies.

Overall, the regulatory investigation is ongoing, and its impact on quantitative trading strategies in China remains uncertain.

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