The considerable surge in Chinese equities has resulted in margin calls, which are posing substantial challenges for quant hedge funds, particularly those with short positions.
Bloomberg indicates that hedge funds that implement short strategies as part of their market-neutral strategy are susceptible to liquidation.
Last week, the Chinese government announced that institutional investors could obtain central bank financing to acquire equities, which further exacerbated the situation. In addition, officials indicated that they intend to establish a market stabilization fund, which will commence with an initial investment of 800 billion yuan (approximately $113 billion) with the objective of supporting the equities market.
The Hang Seng Index (HSI), which comprises 82 blue-chip companies from China and Hong Kong, underwent an extraordinary rally in the aftermath of these developments, recouping nearly two years’ worth of losses in a mere two weeks. In the same vein, the CSI 300, which monitors the 300 greatest firms in China, has experienced an almost 30% increase since the announcement.
A “rare technical exhaustion of liquidity” was one of the factors that caused turmoil for Liangkui Asset Management, which manages approximately 3 billion yuan ($428 million). Bloomberg obtained a letter to investors in which they referred to the margin calls as “the final straw” in their operations. The liquidations of short positions that ensued as brokerages began to close their positions exacerbated the rally, applying additional upward pressure to an already soaring market.
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