In Depth: China Quant Funds in Firing Line Over Stock Market Volatility

Regulators flag concern that sophisticated computer modeling used by some investors is fueling volatility in equity markets

Many quant fund managers are facing significant losses as the result of massive bets on small-cap stocks that turned sour. Photo: VCG

A three-day trading suspension imposed on a well-known domestic quant fund manager by Chinese regulators this week has shone a spotlight on the activities of investors that rely on complex mathematical models, algorithms and automated trading, and renewed concerns over their role in stoking sudden drops in the country’s stock markets.

The punishment of Ningbo Lingjun Investment Management Partnership by the Shanghai and Shenzhen stock exchanges, announced on Tuesday, was quickly followed by a pledge from both bourses to strengthen supervision of quant, especially high-frequency, trading as well as institutions such as private quant fund management firms.

The heightened scrutiny comes as many quant fund managers are facing significant losses and are being forced to liquidate their investment products because of high demand for redemptions by investors. Their losses are mainly the result of massive bets on small-cap stocks that turned sour.