Quam’s China Fund Slips As Chinese Stock Market Slide Burns Under The Collar

Behind the scenes the slide in the Chinese stock market is said to be blamed on "Americans," in particular prop shops and funds, some with derivatives market experience. A relative value strategy is emerging as the likely culprit, a source said, but the details of the trade are not as important as the punishment, which is said to go beyond arrest.

This comes as reporting discrepancies in hedge fund performance reporting are making real time analysis different for certain hedge fund investors.

Watching hedge fund performance reporting: real time vs monthly visibility

In hedge fund performance reporting there is typically a delay between the point official results are tallied – done in some cases on a monthly basis – and when a market move such as the slide in Chinese stocks is reflected in traditional performance reporting.  Some databases use a monthly update system, while many alternative asset platforms require performance updates on a more timely fashion.

Some platforms monitor performance daily while others use a bi-weekly approach. Some platforms rely on the manager to report, while others, particularly the private ones, rely on direct account tracking on a day to day basis, tallying each manager’s P&L.

The more sophisticated direct managed account platform risk management procedures are known to track the exact positions of various Hedge Funds – when a direct account is used, particularly in algorithmic trading – and then the investor actually has an intraday risk management view.  Some quantitative funds and funds of funds are known to have internal risk management views into all the actual positions and the manager knows, to the second, their current account value, leverage ratios and global positioning.

The exact system details behind the scenes at HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) are unknown, but it is now that the slide in Chinese stocks is apparent, to degrees, in hedge fund performance statistics.

Quam takes a dip as China might have hit bottom

No longer at the top of the 2015 food chain is Quam China Focus Segregated Portfolio. Last week Quam was up 34.92 percent and, by a slim margin, was once again atop the HSBC leader board as of the July 3 reporting date. Seven days later a fall of almost ten percent, very precisely matching the near 10 percent move in the Shanghai composite from July 3, when it was flirting with 4,000, to July 10, when it was touching 3877. As of May 31st the hedge fund was up approximately 60%.

Watching correlations among benchmarks is an inexact science, some might even call it an art. The composition of Chris Choy’s portfolio, a manager primarily educated in Asia with a scientific outlook mixed in to the formula at Lough-borough University of Technology, now has a laser focused on the Pacific region. It is no doubt different in construction than the index and he is currently being rewarded – or tested, it’s hard to tell – in a hockey stick market.  Choy likely did not learn much about hockey in the Pacific Rim or in London, the concept he is most familiar with is likely a move of multiple standard deviation higher magnitude is likely to reverse at some point.

Is the China downtrend over?

Fortunately for Choy and his fund the recent screaming about China disaster worse than subprime might just be the voice that documents the lows, as algorithmic patterns are appear to be normalizing and Goldman Sachs Group Inc (NYSE:GS), the subtle force, has said the end of the China downtrend has arrived. Their words, "It's hunting time in China," sound more appropriate for the region than does the algorithmic market vernacular. But regardless, algorithmic traders know the average size of a counter trend is typically not of the same magnitude as the initial trend – assuming that original trend is valid. Early signals indicate China might have found a bottom for the time being.

Is the China uptrend valid? The Special Drawing Rights currency basket speaks to a legitimacy that is very rarely extended much beyond the "old white boys club" of U.S. and EU central bankers, as a certain former derivatives regulator was found of calling them. While some players are calling for risk management to consider a war with China, others see peace. If China, in the long run, were such a foe, why would they be given admittance to the secret society that is the SDR? Such is the line from China discretionary bulls in the U.S., but mention of the SDR, much like derivatives, an area China has spent trying to carefully figure out, are seldom discussed in public.

In terms of the cause from China's market correction, the exact "perpetrators" have not been idenitified. Algorithmic sources with contacts in China say the Chinese think it was “American” players, in particular prop shops and certain short term funds, who were primarily responsible for China's move lower. Under the hood a relative value play between certain ETFs, stocks and the Chinese index was said to be in play, but the longtime derivatives source did not provide details regarding the trade thesis.  What he did say is that the Chinese were the opposite of happy.

Attempting to translate Chinese concepts into English to describe the tension, he said: “Think about something bad that they want to happen to you.”

“They want to arrest traders?”

“No, think worse than that. It’s a concept between burning someone at the stake and crucifixion.”

As China starts to rebound, let’s watch Choy and how he handles upside and downside deviation.