Credit Suisse and quant advisory firm Rayliant have launched a new index to tap growing offshore demand for quant strategies in China’s home equity market.
The move follows other recent launches into the growing sector. Pinebridge has launched a China A-shares quant fund, while CICC Hong Kong Asset Management and Ping An of China Asset Management (Hong Kong) plan to open up systematic risk premia funds to institutional investors this year.
“We aim to capitalise on the fact there aren’t many quant-driven China investing strategies yet for institutional investors and wealthy clients,” says Stephane Goursat, head of investment solution sales for Asia at Credit Suisse. ““With an allocation mechanism designed by Rayliant, we have an active index optimizing allocation across a series of factors including value, productivity, accounting and Investment conservatism.”
Quant managers account for only 4% of investment in China A-shares equity strategies today.
The Credit Suisse Rayliant China Multi-factor Index will follow a similar strategy to the Rayliant onshore index offered to wealthy Chinese investors through fund manager Noah Gopher.
That index has outperformed the China Securities Index 300 by 6.4% since inception a year earlier.
The Credit Suisse Rayliant index beat the CSI 300 by 5.5% for the full year 2018, based on back-testing results, the firms say.
The index can allocate to the top 300 large-cap stocks traded through the Hong Kong-China cross-border stock-connect scheme and will typically focus on 80 to 100. Stocks with poor liquidity are excluded and concentration risk is managed by capping single-stock weights at 5%.
Rayliant is a Hong Kong-based investment manager led by Jason Hsu, also co-founder of Research Affiliates, a $200 billion investment manager. The Asian business was spun off as Rayliant in 2016 with Hsu taking a majority stake. As of December 2018, $25 billion was managed using Rayliant strategies.
Credit Suisse wraps the strategy in an index and provides long-only or long-short exposure. It also provides exposure to unfunded total return swaps and delta one certificates – derivatives with a linear, symmetric payoff profile such as equity swaps, futures, forwards, exchange-traded notes, trackers and forward rate agreements.
The index is offered at a time when offshore money is expected to pour into China equities. In February, MSCI announced that it is increasing the weighting of 235 of China’s large-cap “A-shares” in its indexes. That is seen as boosting equity flows by over $100 billion in 2019, and by $200 billion each year on average over the next 10 years.
Concerns about accounting data quality have held back the development of quant strategies in China. But Rayliant sees its ability to spot aggressive accounting practices as a competitive advantage.
“Most will say without high-quality accounting data, one can’t build a good quant model,” says Hsu. “Our approach is the opposite. Because we can spot the most aggressive violators of accounting principles, we have an enormous edge over those who don’t know how to process the data.”
Rayliant includes an accounting quality factor in its factor tilts, avoiding companies the firm suspects to be engaged or to be likely to engage in aggressive accounting.
Rayliant also hopes to use big data to identify behavioural anomalies among China’s retail investors that could be a source of returns. Retail investors account for 80% of market volumes.
“China markets are large and dominated by less sophisticated investors, and are thus uniquely suited to our [type of] strategy,” says Hsu.
“Our approach to building a multi-factor quant product is to understand who is consistently losing in that market. And if you think about who’s consistently losing alpha, it’s unlikely to be hedge funds or long-term buy-and-hold institutional investors. You are left studying the behaviours of more retail investors, which in most markets is not terribly interesting. But in China, it is a phenomenal area to fish in for alpha.”
Rayliant’s strategy offered through Noah Gopher, which has about 177 million yuan ($26 million). under management, has risen 11.3% since inception in April 2018, compared with 4.9% for the benchmark CSI 300.