21st Century Business Herald reporter Chen Zhi Shanghai report Recently, Xu Zhongxiang, founder and chief investment officer of Ruilian Caizhi, a large quantitative asset management institution in Hong Kong, was particularly busy. Last month, Shanghai Ruilian Jingchun Investment Management Co., Ltd. (hereinafter referred to as "Ruilian Jingchun") completed the registration of foreign private equity investment fund managers, becoming another foreign asset management institution to enter the Chinese market after BlackRock, Fidelity, Qiaoshui, Nomura and other institutions.
During this time, Xu Zhongxiang is conducting roadshows in many cities to open the fundraising of the first private equity product in China. "The amount of funds raised by Ruilian Jingchun's first private equity product in China is about 200 million yuan." He said in an exclusive interview with a 21st Century Business Herald reporter.
Compared with the global asset management scale of Ruilian Caizhi reaching US$27 billion, the fundraising amount of the first domestic private equity product is only 200 million yuan, which is relatively small.
However, Xu Zhongxiang believes that the landing of the first private equity product is a good start for Ruilian to enter the mainland market.
"We especially hope to find like-minded domestic long-term investors to witness the diversification strategy of Ruilian and create long-term and stable investment returns." He pointed out. Without accumulating steps, there are no thousands of miles. Many large asset management institutions in Europe and the United States can manage hundreds of billions of dollars, all of which have grown step by step, and the reason for their success lies in the fact that their investment strategies have gradually been accepted by the market and recognized by more and more investment institutions. Therefore, Ruilian will also adopt a strategy of steady development in the development of the Chinese mainland market.
"Sometimes I am also afraid that a significant expansion of the scale of product fundraising will cause a decline in performance and affect the trust of investors." This is detrimental to the long-term steady development of asset management institutions. He pointed out.
It is worth noting that the private placement products first issued by Ruilian in China did not adopt its single tool-type fundamental quantitative strategy, but a diversified allocation strategy.
Xu Zhongxiang bluntly said that this is an investment strategy based on the financial environment of emerging markets. "Due to the volatility of emerging markets, any single investment strategy is challenged by large yield fluctuations due to the high volatility of the underlying assets (equities and bonds), so an effective way to achieve long-term and stable returns in the case of effective portfolio volatility is to adopt a highly diversified and diversified sub-strategy portfolio."
In fact, a quantitative strategy that is popular in the European and American markets needs to overcome many obstacles and pain points to successfully land in emerging markets: first, to overcome the shortcomings of the short establishment time and small data samples of the capital markets in emerging market countries, to avoid the limitations of quantitative investment strategies falling into the limitations of data over-mining; second, to overcome the dissatisfaction of quantitative models in the Chinese market, to continuously improve the data learning ability of quantitative investment models and AI machines, so as to obtain long-term and stable excess returns in the market, and refuse to short-lived performance.
Xu Zhongxiang told reporters bluntly that in view of the above pain points, Ruilian Caizhi introduced a large number of new factors to localize and adjust in the face of the diversified strategy model to make it better adapt to the A-share environment; on the other hand, it will introduce a new charging mechanism, that is, it will not charge the Beta income given by the market, and only reasonably calculate performance remuneration for the Alpha part of the excess income, prompting the entire product investment team to pay more attention to the after-fee income of investors and highly bound to the interests of customers.
<h4>Why does the first private placement product in China adopt a diversification strategy? </h4>
"21st Century": What is the progress of the fundraising roadshow of Ruilian's first private equity product in China? What are the expectations of domestic investors for this private placement product?
Xu Zhongxiang: We have conducted fundraising roadshows in many cities in China and found that domestic high-net-worth investors and institutional investors are quite fond of quantitative investment strategies. Many investors hope that we can start from macroeconomic insights, have a precise grasp of future economic development trends, and seize the future investment outlet to achieve high returns.
We share our investment experience with domestic investors. Since 2002, my core team and I have served as co-managers of multi-asset allocation funds at PIMCO, assisting PIMCO in managing the AAF strategy of full asset allocation (peaking at about US$70 billion) and the global macro PARS strategy (peaking at about US$11 billion), during which the fund management team and I experienced many violent turbulences in the global financial market, including the subprime mortgage crisis in 2008 and the outbreak of the epidemic in the US financial market liquidity risk in early 2020. In the end, we found that PIMCO's all-asset strategy was able to achieve relatively stable returns mainly due to the successful avoidance of the impact of the global financial storm through different combinations and diversification of equity strategies, commodity and alternative strategies, and bond strategies.
Therefore, I got an important investment insight - no matter how much investment research is done, it may not be able to resolve all market risks. Therefore, an investment strategy that can continue to create stable returns is not a single strategy of heavy positions, but a high degree of diversification of asset allocation through a diversified strategy, and finally obtains a relatively stable return in the rapidly changing fluctuations of the financial market.
PIMCO's multi-asset allocation strategy is quite similar to Bridgewater Fund's all-weather investment strategy, that is, investing in many different types of assets at the same time, looking for low correlation between different types of assets, so as to maximize the risk of market volatility and win stable returns.
"21st Century": This time Ruilian's first private equity product in China adopts a diversified allocation strategy instead of a single tool-based fundamental quantitative strategy.
Xu Zhongxiang: It is very difficult to rely on a single strategy to defeat the market for a long time. The same is true for A-share market investments. We have done a study, the A-share market is actually quite volatile, many stock prices fluctuate in the annual range of 30%-50%, which means that even if you adopt a very advanced investment strategy, due to the volatility of 30%-50% of the underlying assets (A-share stocks), any single investment strategy will inevitably have to withstand extremely high volatility.
Ruilian's response method is to build multiple sub-strategies such as stock bulls, CTAs, equity neutrality, macro/asset rotation, and long-short arbitrage of stock index futures in the secondary market through diversified strategies, such as based on a unified investment logic framework, to achieve a steady return on investment that can cross bulls and bears.
In addition, the development experience of the European and American investment markets shows that there are certain limitations in a single strategy, and it is difficult to achieve the ideal situation of "high return and low risk", such as many investors like to invest in "high yield + low risk + large capacity" private equity products, and it is difficult for a single strategy to achieve these investment preferences; secondly, although the stock long strategy has high returns, there are also risky characteristics, and many investors may not hold it for a long time; Finally, the bond strategy seems to be less risky, but the return is not high enough, which may not meet the return expectations of investors.
"21st Century": What role will Ruilian play in the diversification strategy that Ruilian is good at?
Xu Zhongxiang: Fundamental quantitative strategies play an important role in our diversified strategy private equity products.
The fundamental quantitative strategy mainly optimizes the stock selection and weight arrangement by introducing factor signals, which not only combines the systematic regularization of passive investment, but also refines the active investment ability through factor selection to achieve excess returns that outperform performance benchmarks.
For example, through the big data analysis factor of the fundamental quantitative strategy, we can accurately assess the changes in the trading sentiment of the A-share market, if the market trading sentiment is too optimistic, resulting in many stock prices being overvalued, we must consider timely control of risks; on the contrary, if the market trading sentiment is too pessimistic and many stocks are wrongly killed, we will boldly bottom out.
At present, in each sub-strategy of our diversification strategy, the fundamental quantitative strategy will be fully applied. For example, the stock allocation strategy structure of this domestic first-place private placement product is to select high-quality stocks through quantitative fundamental stock selection, with the help of multiple factor dimensions, combined with different sub-strategic investment models, and to build a suitable investment portfolio through relatively centralized shareholding.
For another example, investment stock selection is a decision-making process, and the fundamental quantitative strategy is actually to transform this decision-making process into a more scientific and systematic methodology. For example, the first dimension of the decision-making process is to find the key decision-making factors, we find about 180 key factors affecting the stock price through scientific methods, and summarize them into 3 categories: one is closely related to the company's fundamentals, it is convenient to find companies with excellent fundamentals; the other is through the behavior of the company's internal employees, it is convenient to infer whether the company is a good enterprise; the third is through the behavior of market traders, choose the good ones, and finally select a basket of high-quality corporate stocks to include in the portfolio of different strategies. Maximize the risk of market volatility while creating robust returns.
<h4>Different quantitative strategies in Europe and the United States face differentiated regulation</h4>
"21st Century": At present, Ruilian's fundamental quantitative strategy has attracted more than 150 billion US dollars of funds from all over the world to follow investment, including many pension funds and university funds, can you explain the unique value of the fundamental quantitative strategy and attract investors?
Xu Zhongxiang: I personally feel that the reason why many international pension funds and university funds value the fundamental quantitative strategy is mainly based on four considerations, one is to create a new portfolio through different sub-strategies with low allocation correlation, and finally achieve a relatively stable and smooth long-term investment return curve; second, based on quantitative models and big data analysis, the dynamic optimization of the asset portfolio can be optimized according to market changes, so that the entire asset allocation is no longer based on future returns, but the risk contribution of each sub-strategy. Achieve a higher risk parity effect; third, the return on investment will increase significantly with the lengthening of the holding period; fourth, the entire asset allocation can adapt to different market environments, especially in the event of extreme risk events can remain stable.
In layman's terms, the fundamental quantitative investment strategy makes their trading strategy and asset allocation adjustment more "disciplined", will not be affected by the subjective judgment and trading sentiment of fund managers, investment decisions become more scientific, and the stability and visibility of returns are higher.
In addition, the quantitative strategy has an advantage, even if the fund manager leaves or replaces, the quantitative strategy will not change significantly with the change of the fund manager, and the entire asset allocation portfolio can maintain the previous investment logic to the greatest extent, and have a better chance of achieving the initial investment return expectations.
21st Century: But we have also noticed that with the increasing popularity of quantitative strategies, its impact on the abnormally large fluctuations in global stock markets is increasing, how are the financial regulators in Europe and the United States currently regulating quantitative strategies?
Xu Zhongxiang: With the increasing popularity of quantitative strategies in the financial markets of Europe and the United States, in recent years, the financial regulatory authorities of some European and American countries have also begun to strengthen the supervision of quantitative strategies.
At present, some countries' financial regulatory authorities divide quantitative strategies into two categories, one is high-frequency quantification, and the other is low-frequency quantification.
The former is mainly a programmed trading model, capturing various pricing error opportunities in the financial market, and obtaining the corresponding spread profit opportunities by quickly grabbing orders, etc. This kind of high-frequency quantitative strategy may not be a large amount of single transaction, but the frequency is extremely high, and each profit may not be very high, but through frequent transactions, "accumulate into more", and eventually create a higher annualized income.
However, many european and American financial regulatory authorities believe that this kind of high-frequency quantitative trading is a "noise-type investment behavior", because they do not analyze the company's fundamentals and long-term investment value, more grasp the market mispricing situation to obtain profits, but bring sudden liquidity risk to the stock market, before the US stock market has several times fell circuit breaker, is because of high-frequency quantitative investment institution system errors (disorderly selling) or sudden bursting (triggering collective stop-loss selling) caused. Therefore, such high-frequency quantitative trading may face stricter regulatory pressure.
The latter is mainly through big data analysis and other quantitative strategies, looking for listed companies with growth potential for long-term allocation, the transaction frequency is relatively low, fundamental quantification has become the main form of low-frequency quantification, but also the current mainstream quantitative strategy in the European and American markets, many European and American financial regulatory authorities believe that this is a new form of value investment, the current low-frequency quantitative strategy seems to face lower regulatory pressure.
In fact, the rapid development of high-frequency quantitative strategies is largely due to the active trading of retail investors, which increases the number of mispricing conditions and gives them a full place to use. However, in the European and American stock markets, with the vigorous development of institutional investors, the efficiency of market transactions continues to rise, the probability of mispricing is decreasing, and more and more large asset management institutions are turning to low-frequency quantitative strategies, focusing more on finding long-term allocation of high-quality listed companies through fundamental quantitative strategies to obtain more stable returns.
<h4>How to overcome the quantitative strategy of foreign investment? </h4>
"21st Century": Will Ruilian's diversification strategy only focus on low-frequency quantitative strategies and avoid high-frequency quantitative strategies as much as possible? Many private equity products issued by foreign asset management institutions in China are facing problems such as unsatisfactory investment models, how will Ruilian solve them?
Xu Zhongxiang: Ruilian's first diversified strategic product in China is a combination of low-frequency quantification and high-frequency quantification. The diversified strategy portfolio constructed by the fundamental quantitative strategy is used as the product floor position, mainly to create relatively low volatility and stable investment returns, and we will also work with some high-frequency quantitative trading strategy teams that have been successfully operating in the A-share market as a starting point for creating excess returns. However, how to match low-frequency quantification and high-frequency quantification, we will dynamically adjust according to the fluctuations of various assets in the domestic financial market.
In view of how the investment model can overcome the problem of water and soil dissatisfaction, we have adjusted some factors of the fundamental quantitative strategy, such as introducing many factors that have failed in the European and American markets, but may still be effective in the domestic A-share market, and creating many new factors related to the local market.
For example, due to the fairly perfect information disclosure of listed companies in Europe and the United States, many European and American asset management institutions have no longer included the financial reporting factor into the quantitative strategic investment model, but we may add it to the fundamental quantitative strategy factor pool of the first private equity product in China this time. Because the financial information disclosure of some A-share listed companies needs to be continuously improved, we can find out which listed companies have financial defects through the financial reporting factors, and obtain excess returns through the corresponding arbitrage investment strategies. In addition, we have also built a new exchange factor, we found that the domestic stock exchange is quite conscientious, once the listed company has abnormal business behavior will send a letter to inquire, which is rarely seen in The European and American stock exchanges, through the exchange factor, we can timely understand which listed companies have abnormal business behavior, but also can take arbitrage investment strategy to obtain new investment returns.
In fact, in 2009, Ruilian has introduced the fundamental quantitative strategy into the Chinese A-share market, actively cooperated with the China Securities Index, the Shenzhen Stock Exchange and the Shanghai Stock Exchange, and accumulated many experiences in the localization adjustment of factors, which is conducive to the fundamental quantitative strategy and diversification strategy to better adapt to the A-share market environment.
"21st Century": With the continuous switching of A-share styles and the continuous prominence of investment hotspots, which quantitative strategies do you think will eventually stand out in China? In the future, will Ruilian's domestic private equity products incorporate these outstanding quantitative strategies into the investment model?
Xu Zhongxiang: Frankly, I don't know which quantitative strategies stand out. However, it is an indisputable fact that the style of the A-share market is changeable, which will cause investors to choose products "when it is difficult to choose". Specifically, the performance of any single strategy has ups and downs, and it is difficult to have a winning general, which makes it quite difficult for investors to trade in a timely manner through select products.
In a way, this is one of the main reasons why our first private placement in China has adopted a diversification strategy. Only by achieving balanced, diversified and decentralized asset allocation can we obtain relatively stable investment returns in the stock market with changeable styles.
In addition, we don't like to follow the trend, such as a quantitative strategy that is too popular with institutions, and we may not follow up. Because when many capitals pour into the same quantitative strategy, it will cause trading congestion, making the quantitative strategy less efficient at capturing excess returns.
In fact, the quantitative strategy of foreign quantitative asset management institutions to stand out in the A-share market needs to have six major capabilities, one is to contribute differentiated excess returns through localization research, the second is to make full use of machine learning models to continuously improve the efficiency of factor information, the third is to be good at successfully applying the rich investment experience of overseas markets in the Chinese market; the fourth is that the excess returns are universal and significant; the fifth is the strong ability of institutional customized services; and the sixth is that the performance is not lost to other quantitative strategies, and the income differentiation is obvious.
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