(Bloomberg) -- China’s biggest stock market rally in more than a decade has added pressure on the nation’s quantitative hedge funds.
Quants that short index futures as part of their market-neutral strategies faced additional margin calls as shares continued to surge on Monday, according to people familiar with the matter. The scale of requests was generally smaller than on Friday when an exchange glitch made it harder for funds to raise cash, the people said, asking not to be identified because the information was private.
Some managers informally conveyed to regulators the need for more time to meet margin requests, the people added, underscoring the scale of the pressure they faced. Some were able to meet an initial round of margin calls before extended deadlines to avoid getting hit by liquidations.
Market-neutral products, which involve holding long positions in individual stocks while shorting stock index futures, typically suffered a drawdown between 3 to 5 percentage points last week, the people said. The declines are a setback for quants that are still recovering from a market rout in February.
A confluence of events — including a “rare technical exhaustion of liquidity” in the Shanghai bourse — sparked the chaos on Friday, according to Liangkui Asset Management, which oversees about 3 billion yuan ($428 million).
As brokerages forced the closure of short index futures positions of clients who failed to add required margin, that delivered “the last straw on the camel,” the fund wrote in a letter to investors, seen by Bloomberg. Liangkui Asset averaged a drawdown between 1.5 and 2.5 percentage points, the letter said.
The declines contrast with a 13% gain in the benchmark CSI 300 stock index since Friday, the biggest two-day advance since September 2008.
When the surge in index futures exceeded gains in the underlying stocks on Friday, it imposed paper losses on some quants’ hedging positions, according to Liangkui Asset. When brokerages closed the short positions, they pushed the index futures further up along with investors betting on a further rally, worsening the short squeeze, it said.
The massive premium is expected to narrow, which will allow quants to recoup some of the unrealized losses on the hedging positions, some managers say. China’s stock index futures typically maintain a discount to the underlying indices, which is a key part of hedging costs in the market neutral strategy. Their long-only strategies such as enhanced index products were bolstered by the market rally.
©2024 Bloomberg L.P.
