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| Performance and Systematic Tail Risks of Chinese Quantitative Hedge Funds |
| LIAO Yongyi, XIANG Haotian
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| Guanghua School of Management, Peking University |
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Abstract With the steady advancement of China's multi-tiered capital market, quantitative hedge funds driven by algorithmic trading have experienced rapid growth over the past decade, becoming a critical component in fostering robust financial institutions and effective financial regulation. Leveraging the wealth management capabilities of quantitative hedge funds while enhancing their risk resilience, all while cultivating internationally competitive financial institutions and safeguarding against systemic risks, has emerged as an important issue for regulators.
However, there remains a lack of systematic empirical analysis regarding the actual risk exposures and performance of quantitative hedge funds. Compared to qualitative hedge funds and mutual funds, quantitative hedge funds possess stronger technical capabilities, employing algorithmic trading, high-frequency strategies, complex short-selling techniques, and high-leverage designs. These characteristics may allow them to target non-traditional risks more effectively. Consequently, their wealth management approach may differ significantly from that of traditional institutions. Due to the lack of comprehensive empirical studies, there is still considerable divergence in how regulators, market participants, and other stakeholders perceive quantitative hedge funds, often sparking heated discussions on related topics.
This study conducts the first empirical analysis of the risk and performance of Chinese quantitative hedge funds, shedding light on their distinct characteristics within the Chinese context. Specifically, we utilize the widely adopted Suntime database, which offers robust coverage of Chinese quantitative hedge funds, enabling a systematic investigation of their risk and performance. Based on monthly data from 6,784 stock-strategy quantitative hedge funds between July 2015 and June 2024, we first examine their systematic tail risk. Our findings reveal several key insights. First, the quantitative hedge fund industry as a whole exhibits positive exposure to the systematic tail risk factor. Second, this systematic tail risk factor carries a risk premium that cannot be fully explained by the Carhart four-factor or Fama-French six-factor models. After accounting for exposure to this factor, the average alpha of funds decreases further. Additionally, through Fama-MacBeth regressions, we find that funds with higher systematic tail risk achieve higher excess returns. These results consistently indicate that Chinese quantitative hedge funds are indeed exposed to systematic tail risk, with the associated risk premium potentially serving as a key driver of its performance. Further analysis confirms that funds with higher systematic tail risk suffer more severe losses during market tail risk events, warranting heightened regulatory attention due to their potential adverse impact on the market. Moreover, we find that quantitative hedge funds exhibit greater exposure to systematic tail risk compared to qualitative hedge funds, and their risk levels are correlated with the characteristics of fund managers and clients. These results underscore the importance of strengthening regulation of quantitative hedge funds to mitigate major financial risks.Beyond the risk premiums derived from risk exposures, we also explore funds' ability to generate alpha. Our analysis reveals that the Chinese quantitative hedge fund industry, on average, does not produce significantly positive excess returns or alpha.
This study makes three key academic contributions. First, it significantly enriches the literature on securities investment funds by providing the analysis of risk exposures and performance in Chinese quantitative hedge funds, revealing their unique characteristics in China. This addresses gaps in understanding their wealth management and risk resilience capabilities. Second, it advances the literature on systematic tail risk by extending its study to asset management, demonstrating that quantitative hedge funds are affected by systematic tail risk and highlighting its spillover effects on financial institutions from a new perspective. Third, it contributes to the literature on quantitative trading. While academic research on quantitative trading is well-developed abroad, it has only recently gained traction in China, where there is still considerable room for improvement in the corresponding market infrastructure. By examining quantitative hedge funds, a key player in China's quantitative trading landscape, this study elucidates their performance and underlying risks, providing policy insights for better managing and guiding the development of quantitative trading in the future.
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Received: 20 January 2025
Published: 01 September 2025
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