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Alternative Market Briefing

Quant manager takes advantage of unique China A-Share market opportunities

Thursday, September 09, 2021

Dr. Bo Huang
B. G., Opalesque Geneva:

China A-shares, the stock shares of China-based companies, are offering unique opportunities according to Jasper Capital.

Shenzen and Hong Kong-based Jasper Capital is one of China's longest established quantitative investment managers and is focused solely on China A-shares.

"Jasper Capital was designed since inception in 2013 to take advantage of the unique mispricing and arbitrage opportunities that exist in the China A-share market," says Dr. Bo Huang, senior portfolio manager and the head of Jasper's quantitative investment team, during Opalesque's latest Virtual Manager Visit.

According to this manager, China's equities market is large, very liquid, and still rapidly liberalizing. "Yet despite these favourable features, many allocators and global investors remain underweight as China was not represented in major indices for a long time, and benchmarking has therefore created a forced underweight exposure. China is clearly a big part of the world so in our view it should be an important part of investors' portfolios."

Jasper's products

The firm offers three core strategies to access the China A-share opportunity set: quantitative long-only, quantitative market neutral, and quantitative directional. They extract excess returns in the A-shares market from two primary sources: (1) mis-pricing created due to the retail-driven nature of the market, and (2) the market microstructure. In terms of its signal frequency and portfolio turnover, Jasper is a mid-frequency quant manager.

Each of Jasper's strategies has an onshore and an offshore version and slightly different returns. The market-neutral product's onshore and offshore versions, for example, use the same models. But performance differs quite a bit due to the hedging instruments that are used.

"Onshore, there's more options as well as greater flexibility in terms of the ability to use index futures whereas offshore, the hedging instruments at this point in time are relatively limited to the index swap short which is a termed swap," says Dr. Bo Huang.

The A-share market

China A-shares are the stock shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE), according to Investopedia. Historically, China A-shares were only available for purchase by mainland citizens. But since 2003, select foreign institutions have been able to purchase these shares through the Qualified Foreign Institutional Investor (QFII) system.

China A-shares are different from B-shares; A-shares are only quoted in RMB, while B-shares are quoted in foreign currencies and are more widely available to foreign investors. Due to the limited access of Chinese investors to B-shares, the stock of the same company often trades at much higher valuations on the A-shares market than on the B-shares market.

To connect with international investors, Jasper set up a Hong Kong office in 2017. The office is registered with Hong Kong's SFC and with the SEC in the U.S.

The way international investors can gain exposure to the China A-shares market has become a lot easier in recent years, according to Benjamin Pollock, head of Jasper's Hong Kong office. Prior to 2014, the only way to gain access to the A-share universe was by having your own QFII license. With the introduction of the Stock Connect channels in 2014 and the expansion of that channel in 2016, there are now more access points.

Stock Connect and Bond Connect are two offshore mutual market access schemes via Hong Kong. They give offshore investors licence-free and (at the individual investor level) quota-free access to Chinese assets, while also providing outbound investment channels for Chinese institutions and residents. There is a third offshore scheme which is the Shanghai-London Stock Connect, which offers the possibility for Chinese and UK issuers to list their stocks on each other's stock exchanges.

"Jasper Capital Hong Kong primarily gains access via Stock Connect as well as QFII on swap. We also more recently applied for our own QFII license, which in the future will allow us to invest directly and gain exposure to things like IPOs as well as index futures for shorting purposes," Pollock says. Investors can invest either via a fund or managed accounts.

Market sentiment

China's market sentiment was dampened in July 2021 by fears of an economic recovery slowdown and policy tightening in industries such as education, e-commerce, real estate, and healthcare. Some have said fear-driven investor overreaction is doing more damage than the new regulations.

Hong Kong stocks today fell by the most in three weeks as concerns about regulatory tightening in China revived after Beijing chastised mobile games developers and froze approval for new titles, reports the South China Morning Post. But market reactions to China's regulatory tightening tend to be too pessimistic and dislocations in market prices may be a chance to buy as values emerged, said Baring Asset Management.

The Eurekahedge Greater China Hedge Fund Index, which comprises 82 hedge funds that invest in Greater China, was down 4% in July and down 2% in August. It is down 0.5% YTD after returning 36% in 2020 and over 16% in 2019.

The SSE Composite Index, a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange, is up over 6% YTD. The MSCI Golden Dragon Index, which captures the equity market performance of large and mid-cap China securities, is down 3% YTD (to end-August), while the MSCI China A Onshore is up 0.5% YTD.

You can view the full interview here:

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