Ex-Wall Street bankers bring science to China's rocky stock market

Mon Apr 16, 2012 1:22am EDT
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By Samuel Shen and Kazunori Takada

SHANGHAI (Reuters) - Ex-Wall Street bankers are betting science can exploit opportunities in China's often rumor-driven stock market, with some predicting the quant-driven fund industry to grow by as much as 10-fold to 100 billion yuan within a few short years.

Former Goldman Sachs banker Shen Yi is confident his newly-launched 20 million yuan ($3.17 million) quant fund, which trades purely on complex mathematical calculations pre-programmed in computers, can beat the market.

"Models sum up history and predict the future," said Shen, who holds a doctorate degree in physics from Oklahoma State University. "Markets change, but human nature doesn't."

Since 2010, when China rolled out index futures, margin trading and short selling, more than 30 quant funds, or those that use statistical models rather than fundamental analysis to make investment decisions, have been launched, many of them by former Wall Street bankers like Shen.

There are no official or industry data on the size of China's quant fund industry, but Shen, based on his knowledge of how his rivals are doing, estimates the assets under management to be around 10 billion yuan. He believes the industry could grow 10-fold to 100 billion yuan in just three years.

These fund managers are betting that the quantitative approach, which follows a set of mathematical techniques to evaluate risk, pricing and timing of trade, can get traction in China as mutual funds struggle to make profits in a stock market which has fallen nearly 30 percent over the past 2 years.

"In a bull market, no one would listen to us. But now it's different," said Tang Weiye, who manages about 200 million yuan for quant-driven hedge fund Credence Oriental Partnership.

The fund has so far generated a return of more than 200 percent, helped largely by its short futures positions during the 2008 market slump, he said.   Continued...

A man monitors an electronic screen at a brokerage house in Shanghai March 17, 2009. REUTERS/Aly Song