Shanghai-based XY launches first offshore quant fund

    Shanghai-based XY Investments, one of China’s leading onshore quantitative fund managers, is launching its first US dollar-denominated offshore fund focused on China’s A shares. The Cayman-registered fund is targeting a launch size of US$30-50 million and has already selected Deutsche Bank as both prime broker and custodian.

    The new XYZ Long Short Fund will seek to generate interest from large institutions inside and outside China – especially those that have significant access to pools of US dollar cash and which still want to invest in the Chinese market despite the difficult conditions in recent months.

    Tony Tang, a Chicago Booth finance PhD who is the fund’s portfolio manager and CIO at XY Investments, was a former global macro portfolio manager responsible for equity index futures and currency strategies at AQR and BGI/BlackRock.

    The new fund is structured to replicate the quantitative “alpha+beta” strategy the team has been running from Shanghai since 2014 but “with a slightly different twist”.

    The new fund will take long positions in China A shares from Hong Kong through the Hong Kong Shanghai Stock Connect and actively trade Singapore’s A50 index futures contracts to hedge long exposures, besides investing in treasuries and using reverse repos, with the aim of delivering above-average risk-adjusted returns.

    The group’s flagship “alpha+beta” fund run from Shanghai has delivered a cumulative return of 41.7% with a Sharpe ratio of 3 since it was launched in February 2015. As a result XY is now on the select investment lists of many insurance companies, banks and investment trusts.

    Tang relocated to Shanghai in 2013 and became the chief asset allocation officer at Minsheng Life Insurance and Minsheng Tonghui Asset Management Company before joining XY.

    His wife Cindy Zhou, who was also a former colleague at AQR and BlackRock, established XY in 2014 from seed money provided by several large Chinese institutions including banks and brokers. The company’s rapid growth attracted Tang to join her at the new firm in 2015.

    Zhou says in the first two months of the year their flagship strategy “weathered the storm once again despite the significant correction and volatility that swept through the market”.

    By combining two negatively correlated strategies of market timing and stock selection, XY funds have been able to deliver consistently higher risk-adjusted returns, according to Zhou.

    The firm launched an offshore research office in Singapore last year run by Heng Yue, a former chair professor at Peking University. However, the firm is still considering whether to locate its main offshore investment operation in Hong Kong or Singapore.

    XY runs three types of funds. The first is a “pure alpha” strategy with 12% expected return and 4-5% maximum drawdown. The second is an “alpha plus beta” strategy that targets 10% volatility and has an expected annual return of around 20%. And the third is a pure beta strategy.

    Tang said that the three funds are designed to appeal to different investors groups with varying degrees of risk tolerance.