Chinese quantitative hedge funds endured their most challenging week in over two years, as 73 funds designed to outperform the CSI 1000 Index of small-cap Chinese stocks saw an average decline of 14% in the week ending July 17. These funds also trailed their benchmark by an average of 1.9 percentage points. This downturn, which saw the CSI 1000 fall over 12%, was likened to the market turmoil that affected quants in February 2024. The sharp losses were primarily attributed to an abrupt reversal in highly concentrated trades, particularly in tech and high-momentum growth stocks, which had previously led gains but sold off rapidly due to weakness spreading from overseas AI shares. Forced deleveraging and increased risk aversion exacerbated the decline.
Several prominent quant funds experienced significant losses. BlackWing's stock strategy, for instance, plunged 19.39% in net asset value during the week, marking its steepest decline since inception. Joe Zhou, a high-net-worth investor, reported his $2.75 million (20 million yuan) investment with BlackWing Asset Management had fallen nearly 30% in recent weeks. Other major players also suffered, with a CSI 1000 fund managed by DeepSeek founder Liang Wenfeng's High-Flyer, overseeing more than $10 billion, dropping 15.7%, and Beijing's HanTak losing an estimated 16.1%.
Regulators have intensified their oversight of the $260 billion quant sector following this market turmoil. Authorities pledged to strengthen risk prevention and enhance scrutiny of quantitative trading and AI-related applications. This crackdown comes after a February market crash, dubbed China's "quant quake," and includes measures like restricting short-selling, suspending Lingjun accounts for market disruption, and punishing another quant fund for high-frequency trading. Fund managers are now beefing up risk management and retooling portfolios to conform to stricter regulations, with some reducing exposure to small-capital stocks or committing to a "bullish stance" on Chinese equities.
