Quantitative fund homogenization and systemic risk in the stock market

Mengyu Li, Qian Zheng and Shan Ji

Abstract

Using data from 421 active quantitative funds in China from January 2015 to March 2024, we design a homogenization measurement method from the perspectives of return rates and Sharpe ratios, validating its robustness through cross-sectional and time series analyses. We study the impact of quantitative fund homogenization on systemic risk in the Chinese stock market, with implications for risk model validation in high-frequency trading environments. Our findings reveal four key insights. First, multiple indicators demonstrate significant homogeneity in Chinese quantitative funds, with pronounced convergence shown by both individual funds and the stock market more generally. Second, this homogeneity reduces funds’ market coskewness while increasing their individual systemic risk contributions, primarily through amplifying investor sentiment and intensifying market manipulation. Third, cross-sectional analyses show stronger effects among larger funds, during high-volatility periods and in bullish markets. Fourth, the homogenization of quantitative funds does not directly trigger systemic risks of the entire stock market. We propose and explain the divergence problem of the impact of quantitative fund homogenization on systemic risk in the individual and aggregate dimensions, and we provide policy recommendations for promoting the healthy development of quantitative funds and mitigating the systemic risks of the stock market.