Why do quant funds always become the target of blame every time the A-share market fluctuates?

By Lili Yu

Edited by Jing Liu

Quant funds have once again become public enemy number one.

On August 30, Securities Times affiliate Broker China reported that "quant funds will face regulatory tightening," citing sources who claimed they had received phone inquiries about the market action that Monday. The article listed multiple details, including that "regulators will summon quant funds to a meeting in Qingdao" and that "relevant rules will be introduced before October."

Waves reached out to several top-tier quant private funds for confirmation. All denied receiving such inquiries and noted that the idea of regulators "organizing a special trip to a specific location for a meeting" didn't align with standard practice.

This wave of quant-bashing originated on August 28, when what was billed as a "historic" stamp duty cut sent A-shares surging at the open — only to fade and close lower, dashing expectations. As one industry observer put it, quant trading, long criticized for "amplifying rallies and sell-offs" and "emotionless trading," made for an ideal "emotional outlet."

Interwoven with this were two additional developments that fanned the flames: notices from third-party software vendors suspending T+0 algorithmic trading services, and news that Minghong Investment founder Hui Ming Qiu had purchased a Shanghai residence for 285 million yuan.

As a relatively new species in the market, being misunderstood seems almost the fate of quant funds. The widely circulated article "Quant Funds: The Main Force Smashing the Market Today" encapsulated many retail investors' understanding of quant investing — including their misconceptions.

Many tend to equate: quant funds = market-smashing main force = T-trading strategies = high-frequency trading = algorithmic trading. These views aren't limited to retail investors and traders; they extend to prominent active managers as well.

Take T-trading strategies. Dan Bin, the well-known private fund titan behind Oriental Harbor, reposted the article with the comment that he "doesn't really understand quant funds," then added indignantly: "If quant firms can do T+0 as the article suggests, why can't ordinary investors?"

In response to Dan Bin's question, a partner at a top quant fund told Waves: "The rules have always been the same for active managers, quant funds, and retail investors alike. As long as you held shares at yesterday's close, you can buy 100 shares at today's open and sell 100 shares in the afternoon. Quant has no special privileges."

A principal at a billion-yuan private fund told Waves that among equity quant funds, the dominant strategies are quantitative stock selection, index enhancement, and market-neutral strategies. Only a tiny fraction employ T+0 strategies on their underlying positions. Most quant funds run near-full stock positions. Barring redemptions, they don't normally initiate active reductions.

Another partner at a leading quant fund added: "Many assume quant positioning mirrors the day's market direction, but because they benchmark against indices, cash itself is a risk asset. Holding cash isn't safe — if there's a sharp rally, you can't catch up. This is especially costly for products charging performance fees based on excess returns, which can inflict major losses on the manager."

On the perennial charge that quant investing "amplifies rallies and sell-offs," a founder at a major quant private fund explained that while domestic mid-to-large quant shops vary considerably in their specific approaches and performance, "broadly speaking, positions are extremely diversified — a single stock typically doesn't exceed 1-2% of fund assets, and there's never concentration in a handful of sectors or themes." Position changes are also very gradual, "with most quant products having their position limits hard-coded at the fund contract level." Moreover, strategies generally don't react to short-term "news" events, because "things that haven't occurred hundreds or thousands of times in history simply can't be processed mathematically — or through quantitative methods."

Regarding abnormal market moves that diverge from fundamentals, another industry figure told Waves that the more fundamental issue is identifying "those who trade improperly under the banner of quant or even value investing." He also believes short-term macro market fluctuations are more critically driven by "confidence." With confidence, the expectation of "making big money today" doesn't evaporate after a gap-up-and-fade.

But why does quant investing always end up in the crosshairs?

Waves examined this in detail in last year's article The Trillion-Yuan Quant Fund Fog: A Restricted Game:

Quant investing is an import from the US. Though it has a 12-year history in China, for most of that time it remained a rather quiet, marginal form of investing. In 2021, it broke into the mainstream consciousness thanks to rapid AUM expansion, attractive returns, and wealth stories even more dazzling than those of active management. Yet to this day, a leading quant investor maintains that quant investing "hasn't entered the mainstream discourse."

This difficulty stems first from its cognitive barrier. Quant investing is inherently opaque, and the application of machine learning and deep learning has earned it the label "black box." Many speculate wildly due to the non-transparency and non-disclosure of quant models and strategies.

This explanatory challenge, combined with an industry culture that is somewhat "autistic" and reveres the tech-nerd ethos, has created considerable conflict and misunderstanding with established active managers and retail investors alike.

Many even conflate manual T+0 with programmatic trading and mainstream quant.

A senior figure at a top quant private fund noted that quant investors may use programmatic trading to execute strategies, but may also trade manually — especially for lower-frequency strategies. Meanwhile, non-quant investing can also employ programmatic trading. In fact, some hot money traders use quant trading, particularly programmatic execution, to the detriment of investors — but ordinary investors struggle to distinguish them from mainstream private funds.

Regarding the skepticism quant investing faces, a founder at a mid-sized quant fund told us that even in the mature US market, voices persist accusing high-frequency techniques in quant of being accomplices to investor exploitation.

At the same time, he believes quant investing demands a more rational perspective. "The emergence of any new technology disrupts existing interest structures and may create some unfair competition, drawing accusations. But one must also recognize the benefits of this competition. It reduces transaction costs and bid-ask spreads, improving liquidity."

In the US, the largest quant funds have surpassed $100 billion, representing roughly 30-40% of all securities-focused private funds.

In China, data from Q2 this year shows total quant AUM at approximately 1.5 trillion yuan. Of this, equity quant strategies account for no more than 1 trillion yuan. Estimated daily quant trading volume is around 100 billion yuan, roughly 20% of total market turnover.

In his view, this is only the beginning.

Image source | Visual China

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