China Quant Funds Draw Billions as AI Trounces Human Traders - Bloomberg

Quant funds in China have become so popular that they are being deluged with investors’ money.

Ubiquant, one of the top players, raised 2.6 billion yuan ($384 million) in less than two hours for a new fund in May, according to people familiar with the matter. Investors also snapped up over 100 million yuan of a product from Shenzhen ChengQi Asset Management Ltd. within seconds, a product distributor said.

They’re not alone. Quants’ assets under management have more than doubled in less than a year to more than 2.6 trillion yuan. The frenzy is being fueled by the success of their rapid adoption of artificial intelligence. While Chinese investors have traditionally favored star managers over computer models, last year the machines trounced humans by more than 20 percentage points. The funds are churning out new products that are being snapped up by investors who are abandoning stock pickers.

“Quants’ breadth in covering thousands of stocks has prevailed over the depth of research pursued by discretionary long-only managers,” said Chen Xu, chief operating officer of BigQuant.cn, a technology provider that has co-authored white papers for quants since 2021. “Quants have finally become mainstream and there’s no turning back.”

This has led to the explosion of investing products offered. New quant products more than doubled last year to 6,296, accounting for 46% of all new hedge funds, according to an Industrial Securities Co. report in January. Among the more than 3,000 new products registered by top managers, more than 80% were launched by quants.

Long-only stock quants gained 44.7% last year, beating their discretionary rivals by 20.3 percentage points, according to Citic Securities Co. That compares to their average lead of 13 percentage points over the preceding five years and was the strategy’s widest edge since 2021, according to the data.

The success of quants in China’s 8 trillion yuan hedge fund industry is a stark reversal from two years ago. The sector had been hit by a series of management failures, drawing the ire of government regulators. The funds were blamed for excessive volatility and market blowups. The exchanges cracked down on the use of high-frequency trading to circumvent transaction limits and tightened supervision of leveraged products.

One dramatic example is the turnaround of Ningbo Lingjun Investment Management Partnership. In early 2024, its trading models executed a highly concentrated batch of sell orders that triggered exchange penalties and plunged the firm into a crisis.

In response, Lingjun forced portfolio managers to meet stricter risk parameters for their algorithms and started real-time monitoring of firmwide trading data. It also added shorter-horizon signals alongside medium- and long-term models.

As a result, the company last year led the rankings among top quants with an average return of more than 70%, according to Shenzhen PaiPaiWang Investment & Management Co., a consultancy that tracks hedge funds in China.

Lingjun’s comeback also captures a deeper industry shift. Top-tier quants, leveraging their first-mover investments on AI, talent pools, and data advantages, have built a “technological moat” that smaller firms find difficult to cross, according to a report from Guolian Minsheng Securities Co., a brokerage which distributes hedge funds.

That’s fueled Lingjun’s ambitions to join in the fund-raising boom. After avoiding adding new investors for about two years while it focused on internal improvements, Lingjun now aims to expand its assets under management by between 20 billion yuan to 40 billion yuan, according to Chairwoman Cai Meijie. It currently has between 40 billion yuan and 50 billion yuan.

Investment logic has shifted from “choosing quant” to “choosing the quant with the strongest AI capabilities,” making it natural for inflows to concentrate more on the top players, according to Guolian Minsheng’s report.

Shanghai Minghong Investment Management Co. is one example. The firm registered 157 new products last year, making it No. 1 for new launches among Chinese quants. It has grown even faster this year: By the end of May, it had launched another 149 products. The growing range of strategies it has on offer has given it more capacity to invest and raise money, according to its founder Qiu Huiming.

The number of quants managing over 10 billion yuan has risen to 74 as of May 31, after overtaking that of discretionary funds last year for the first time, according to PaiPaiWang. There are 139 funds overall managing more than 10 billion yuan in China.

The surge of interest means funds are fighting to hire the best science and engineering students as they race to build and improve their own proprietary models.

Traditional stock pickers are also racing to adapt. Shanghai Minority Asset Management Co. exemplifies the trend to embrace AI. It spent five years transforming from pure discretionary stock-picking to relying on AI agents. It trained the models on its core investment thesis — “excess returns come from the majority’s cognitive biases” — then used the agents to autonomously mine factors that identify those biases faster.

“The moat that once protected us has become a walled prison,“ the company said in an article in May on its WeChat account, citing founder Zhou Liang. “Evolution is not a choice — it is a matter of life and death.”