China Suspends Quant Fund For Dumping $350 Million Shares In 1 Minute

To appreciate how "sensitive" Beijing has become to any sharp and/or continued selling of Chinese stocks, now that public sentiment is adversely impacted by China's relentless rout, look no further than major quant fund Lingjun Investment, which on Tuesday was suspended for three days amid broader regulatory efforts to revive market confidence. The fund's transgression: it broke rules on orderly trading. Or, stated simply, at a time when it's no secret that selling of Chinese stocks is frowned upon, Lingjun took it to the next level when the fund dumped a combined 2.57 billion yuan ($357.4 million) in A-shares in a minute between 9:30 a.m. and 9:31 a.m. on Monday, the Shanghai and Shenzhen bourses revealed in identical statements on Tuesday, and said they would strengthen monitoring and analysis of quantitative, especially high-frequency trading. Such trading "has obvious advantages over small investors in terms of technology, information and speed" and could at times contribute to market volatility, the exchanges said.

The orders from Lingjun to dump stocks in early trade on Monday coincided with rapid declines in the benchmark indexes, the Shenzhen and Shanghai stock exchanges said, adding they would restrict the hedge fund's trading until Feb. 22. The implication was clear: anyone who likewise aggressively sells stocks, is next.

Lingjun is one of China's biggest quant funds, and according to its website, it manages more than 60 billion yuan (supposedly that include the 2.5 billion the fund just dumped). The fund later apologized for the negative impact in a statement on its website on Wednesday, saying that the firm said it "holds long-term bullish views on Chinese stocks and will stick to long positions," adding it will review the problems existing in transactions.

And just like that, selling stocks in China - especially in a brisk manner - is de facto banned.

Chinese quant funds, which use derivatives and data-driven computer models, have already suffered from a steep market sell-off this year and government curbs on short-selling. China's blue-chip index dropped to five-year lows early this month but has since staged a powerful rebound as Beijing has vocally sought to prop up Chinese markets.

"Regulators are sending a clear signal that money should be handed to managers who profit from long-term investment, rather than swift trades," Yang Tingwu, vice general manager of Tongheng Investment, said. Which means that investors such as RenTec, Citadel and Millennium whose investment horizons are measured in the milliseconds or minutes at best, are no longer welcome to China.

Ironically, Tingwu said the punishment could accelerate redemptions in quant funds as investors would ask: "Who's next?" The only problem with redemptions is someone has to sell something, which could be a problem in China these days... so expect a whole lot of gating to take place in the next few weeks.

A hedge fund manager who declined to be named told Reuters that a three-day trading halt was not a huge problem for Lingjun, but was a further blow to confidence in quant funds as regulatory scrutiny intensifies.

As regulators seek to revive market confidence, China's securities watchdog, led by newly installed chairman Wu Qing, held a series of seminars with market participants who proposed tighter scrutiny.

Chinese quant funds already attracted the attention of regulators last year after criticism, including from smaller investors and long-only funds, of a sector able to profit from share price falls and volatility. The industry has also been blamed for its role in causing the boom-and-bust of Chinese small-caps.

China's quant hedge funds totalled 1.26 trillion yuan at the end of 2021, according to the latest official data. The industry has grown rapidly over the last few years, and has attracted foreign players such as Two Sigma and Winton.