Summary of Key Points
In mid-July, the A-share market experienced a significant decline (the Sci-Tech Innovation Composite Index fell by more than 17% in a single week), and many quantitative private equity funds with assets in the tens of billions of yuan suffered heavy losses. Multiple products saw returns decline by over 10% in that week, with some even losing more than 20%. The excess returns that these funds had achieved since the beginning of the year turned negative. The reasons for the sharp drop include the overall market downturn, overcrowding in popular investment factors (such as technology growth and volume-price momentum), a convergence of strategies leading to mass selling, and the inability of quantitative funds with high positions to quickly hedge against risks. It has already been difficult for quantitative funds to achieve excess returns this year (with an average excess return of only 3.11% in the first half of the year, compared to 14% last year). The short-term outlook for these funds remains challenging, but whether they can quickly adapt their strategies and diversify their sources of income will be crucial. The industry is also taking steps to address this by purchasing shares in their own portfolios and upgrading their investment strategies with AI.
How Bad Did Quantitative Private Equity Funds Perform This Time?
Let the numbers speak:
- Even Top Institutions Were Affected: Several products under幻方量化 (Huanfang Quantization) lost more than 15% in a single week, such as “Xin Huai 500 Index Exclusive No. 19 Phase 7,” which fell by 15.82%. Products from other leading firms like 九坤 (Jiukun), 明汯 (Mingyuan), and 衍复 (Yanfu) also lost more than 10%.
- Funds of Large Scale Still Suffered Losses: Black Wing Asset’s 14 products had negative returns for the year, with some losing over 15% in a single week. Two products from 稳博投资 (Wenbo Investment) fell by 23% to 29% in that week, resulting in annual returns of -14% to -20%.
- Excess Returns Turned Negative: Many funds not only saw their excess returns drop below -20% in July but also lost all the excess returns they had accumulated since the beginning of the year.
In simple terms, quantitative funds, which were once seen as reliable sources of stable excess returns, suffered losses just like ordinary retail investors this time.
The Four Main Reasons Behind the Sharp Drop
Industry insiders have identified four main reasons for the severe performance of quantitative funds:
1. The Market Dropped Sharply: Last week, the CSI 500, 1000, and 2000 indices all fell by double digits. Since most quantitative funds invest in small and mid-cap stocks as well as growth stocks, they were naturally affected by the market decline.
2. Popular Investment Factors Turned Against Them: Strategies that focused on technology and momentum (buying stocks that had performed well) generated profits, but due to excessive interest from investors, these strategies became sources of losses when the market turned around.
3. Convergence of Strategies Led to Mass Selling: Many funds used similar data and algorithms, so when market conditions worsened, everyone sold at the same time, creating a vicious cycle of declining prices and further selling.
4. Inability to Reduce Positions Quickly: Quantitative funds typically hold full positions and cannot reduce their holdings or switch to defensive sectors (such as consumer goods or pharmaceuticals) as easily as subjective funds. As a result, they were unable to mitigate the impact of the sudden market decline.
Why Has It Been So Difficult for Quantitative Funds to Achieve Excess Returns This Year?
The difficulty in achieving excess returns is not limited to this recent drop; it has been a general trend this year:
- Changing Market Structure: Previously, quantitative funds profited by diversifying their investments and capturing small price movements. However, this year the market has shown extreme divergence, with only a few technology leaders performing well, while most stocks underperforming the index. Diversified portfolios have become a hindrance.
- Large Scale Reduces Opportunities: The quantitative industry has grown to over 3 trillion yuan, and too much capital is competing for the same types of investment opportunities (e.g., undervalued stocks). This has diluted the potential for easy profits.
- Convergence of Strategies: The factors and algorithms used by top institutions are becoming increasingly similar, reducing the potential for unique returns.
Will Quantitative Funds Improve in the Future?
The short-term and long-term prospects differ:
- Short-Term Challenges: The market is still transitioning from extreme divergence to balance, so the stability of investment strategies will take time to recover, and excess returns may continue to fluctuate.
- Long-Term Success Depends on Fund Managers: If fund managers can quickly update their strategies, diversify their income sources, and manage risks effectively, they can still achieve positive returns.
- Industry Initiatives: Funds with large assets are taking proactive steps, such as purchasing shares in their own portfolios (e.g., Lingjun Investment invested 200 million yuan, and Square and He invested 100 million yuan) to boost confidence. They are also exploring the use of AI to develop new investment strategies, shifting from focusing on speed to depth in their analysis.
In conclusion, quantitative funds are not guaranteed to always generate positive returns, but in the long run, those managers who can adapt to market changes are likely to outperform the index. Ordinary investors looking to invest in quantitative products should consider the diversity of the fund managers’ strategies and their ability to control risks, rather than relying solely on past performance.