Global CTAs take first steps to trading China

Prominent CTAs are already back-testing their algorithms using China market data in preparation for an eventual mainland fund launch.
Global CTAs take first steps to trading China

Overseas commodities trading advisor funds are taking preliminary steps to trade in China, while the number of onshore CTAs and quality of talent continues to grow, heard the recent Battle of the Quants conference in Hong Kong.

A number of “big name” overseas CTA funds have been back-testing their futures trading strategies using mainland exchange data, says Roy Wang, chief executive of Wind Information (Hong Kong), a provider of China financial information.

He declined to name the firms, noting that they run sophisticated algorithms in the US and UK but are unsure if they are suited for mainland markets. “I tell them, ‘maybe it won’t work in China at all’,” says Wang.

He suspects some are already trading in mainland markets through leading onshore domestic brokerages.  “[At] local brokerage securities firms, the trading volumes are growing very quickly,” he says, although he is uncertain of the proportion of transactions done on behalf of global hedge funds.

For large overseas CTA firms China is the next frontier, he notes, adding they are eager to access onshore exchanges. “Everybody has a very close eye on the China market potential.”

British CTA giants Winton Capital and Man Group are planning inroads into the mainland, while their home-grown peer, Brevan Howard, this year announced plans to launch a fund-of-hedge-fund product in partnership with CICC Asset Management, a Hong Kong-based subsidiary of Chinese securities broker China International Capital Corporation.

Meanwhile, the number of onshore CTAs continues to grow, and along with it, the quality of talent, notes Wang.

In a continuation of a trend noted at last year’s Battle of the Quants, China natives working at quant funds and bank prop desks in the US and UK have been journeying home to lend their expertise to onshore fund management houses.

“We believe that is a trend that will be developing further,” says Wang.

With onshore managers still unable to use leverage or short-sell securities, CTA funds are comparatively easier to operate than equity-based strategies.

“In my view, CTA is the first real hedge fund strategy implemented in mainland China,” Jeff Nie, chairman of the Absolute Return Investment Management Association of China, told conference delegates.

Trading in futures onshore has a number of advantages, notes Nie. A number of free-to-access websites provide access to real-time market information on mainland futures contracts – a unique feature that he has only witnessed in China. Real-time data on other markets is provided with a 15-to-20 minute delay, or comes with a cost.

Arbitrage trading is also easily facilitated, Nie adds. “For example, copper is traded in many different markets, [including] Shanghai. But the price is not always the same," he notes.

"The regulators will allow managers who are based in mainland China also to use the same account to trade overseas markets. That means arbitrage [opportunities]. You can take advantage of the price difference among different markets,” says Nie. 

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