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Reforms that helped China win an increasing share of global equity benchmarks have convinced Merian Global Investors the time is right to start deploying more sophisticated investment approaches.
Among them: Market-neutral strategies, which aim to profit from both rising and falling prices through a combination of long and short equity bets. The $36.8 billion investment company will soon add some long-short positions to a number of its portfolios, fund manager Amadeo Alentorn said in an interview in London this month.
“The market appears to be maturing,” said Alentorn, who is also head of research for the global equity team. Merian, formerly known as Old Mutual Global Investors, began to increase its long-only portfolio holdings of Chinese domestic stocks after MSCI said it would boost their weighting in its benchmarks.
China’s $6.4 trillion stock market is the world’s second largest, though subject to conditions not found in developed nations. Authorities have made it difficult to trade options or to sell shares short. In recent months, however, regulators have repeatedly spoken about loosening rules around hedging products.
Merian hopes to use contracts-for-difference, which allow investors to speculate on the price of stocks without owning them, to replicate short bets on Chinese stocks trading onshore, according to Alentorn.
One major risk for fund managers utilizing this approach in the past was widespread share suspensions of the sort seen during the 2015 crash, he said. Last year’s sell-off provided comfort that regulatory measures put in place since then have avoided a similar scenario.
“The new regulations appeared to trigger less suspensions,” he said. “Managements don’t seem to have so much leeway any more, so that was reassuring from our perspective.”
Merian joins other quantitative investors bringing new approaches to China. Systematic fund manager Acadian Asset Management last year launched a strategy targeting Chinese domestic markets.
While market-neutral strategies are rare in China, their adoption has been growing.
“The big change is we’ve started seeing some migration from portfolio managers,” said Pablo Urreta, head of research at Sussex Partners, a hedge fund advisory firm. “Larger companies in the U.S. and Europe have started to look to China’s market as a place where you can capture alpha and generate alpha without taking any market direction, and apply those strategies and models.”
(Adds reference to systematic trading strategy in eighth paragraph.)
--With assistance from Benjamin Robertson.
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