DeepSeek effect? How China’s quant funds thrive amid tight regulatory scrutiny

China's quantitative investing sector has witnessed the birth of 18 funds managing over 10 billion yuan (US$1.5 billion) in assets each during this year's first quarter, showcasing the industry's capacity to generate impressive returns despite stringent regulatory scrutiny. There are currently 159 Chinese hedge funds overseeing more than 10 billion yuan in assets each, capitalizing on the technology-driven momentum in the world's second-largest stock market.

Among the recent arrivals are AXQ Capital, Hopeseek Fund, and Huanian Fund, reported by financial data provider Wind.

Christopher Beddor, deputy China research director at economic research firm Gavekal Dragonomics, noted that many quant funds are currently performing exceptionally well. He attributed this success to the less sophisticated nature of onshore equity markets compared to major global markets, allowing quant funds to generate solid returns through systematic trading strategies initially developed abroad.

Chinese investors are increasingly inclined towards financial assets due to low deposit rates and weak real estate performance, according to Gary Ng, economist at investment bank Natixis. Ng highlighted the growing favorable perception of hedge funds among Chinese investors, citing the availability of more accessible quant trading services.

Chinese brokerages such as Sinolink Securities and Shenwan Hongyuan Securities have started promoting quant trading services via their mobile applications, enabling eligible investors to access China's quant trading platforms.

While quant funds continue to deliver competitive returns, China remains a "very tricky regulatory environment," Beddor cautioned. He pointed out that although Chinese financial regulators are more focused on market outcomes than regulators in other major economies, they can and do regulate quant funds if they believe these firms may contribute to market volatility.

Beddor emphasized that DeepSeek, backed by the Chinese quant fund High-Flyer, may have been a turning point in policymakers' perception of quant funds. DeepSeek, created by a fund rather than a traditional tech company, marked the first instance where policymakers acknowledged the potential of the fund industry in technological development.

Of the top 18 quant funds, five achieved the 10 billion yuan assets-under-management mark in under five years, taking an average of 8.4 years to reach this milestone. As of the end of August, Chinese private securities investment funds, including quant funds, managed over 9 trillion yuan in assets according to the Asset Management Association of China.