Quant Fund Gains 108% by Dumping China Stocks a Day After Buying

(Bloomberg) --

A Chinese quant-trading firm made 108% this year by selling every stock bought the previous day.

Zhang Ruiqi, the 34-year-old chairman of Shenzhen Qianhai United Fortune Fund Management Co., screens about a dozen mainland-listed stocks every day for their turnover, momentum and volatility. He then does it all over again the following day. That strategy, which he calls the “all-in-all-out” method, helped his flagship $5 million fund gain 108% this year through June, according to data provider Simuwang.com.

Rather than pick stocks based on their earnings prospects or dividends, quantitative stock funds typically rely on complex and proprietary mathematical models to generate returns. Instead of buy-and-hold, quants are known for their high-frequency trading systems that are well-suited for high turnover markets like China. Quant strategies have become extremely popular globally in the past few years as traditional stock-picking methods struggled to beat equity indexes.

“Our strategy allows us to make money from stocks that have the strongest market sentiment on a day-to-day basis -- and that has turned out to be overwhelmingly successful so far this year,” said Zhang in a phone interview from his office in Shenzhen.

High trading volumes have been “essential” to the fund's success, said Zhang. It has also been helped by certain sectors sustaining gains, particularly stocks associated with technology, health care, agriculture, consumer goods and baijiu liquor. “Market sentiment on hot sectors this year can typically be sustained for about three to five days, or more,” said Zhang. “So our win rate can be quite high by selling quickly.”

The fund includes other parameters to screen which stocks to pick on any given day -- including volume, current market value, prices and net inflows. It employs an algorithmic trading mechanism for timing when to buy and sell. Investors in mainland China are not allowed to sell shares on the same day of purchase.

The strategy does have limitations, said Zhang. The bigger the fund's size, the more market liquidity it needs -- to the point where assets under management topping 100 million yuan ($14 million) would hurt the strategy's effectiveness, he said. The fund is also not immune to extreme market conditions. “If the decline of the fund's net asset value exceeds 10%, or if its recovery time is too long, we need to re-examine the strategy,” he said.

He is optimistic on the market's prospects for the second half. The CSI 300 Index hit its highest level since 2015 on Friday and leverage is at a five-year high, demonstrating the return of risk appetite at a time Beijing is speeding up efforts to boost stock trading. Total average daily trading volume has hit more than 740 billion yuan so far this year, around 45% higher than that of the full year of 2019, according to data compiled by Bloomberg.

“As long as the trading volume remains above 400 billion yuan per day, this strategy will still be effective,” said Zhang, noting the upcoming revamp of the Shanghai Composite Index and ChiNext market reforms. “Volumes are unlikely to drop.”

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With assistance from Bloomberg