China Securities Journal    Hui Wang    2023/04/03

Wizard Quant, a leading quantitative investment firm established in 2013, has seen ascended to the ranks of top-tier quantitative investment firms, with assets exceeding 10 billion RMB as of September 2021. This achievement mirrors its consistently sustainable performance throughout the years.

In an exclusive interview with the China Securities Journal, Xin Feng, co-founder of Wizard Quant, delved into the potential the implications for rising competition and technological advancements, suggesting a decline in the excess returns. Furthermore, he emphasized that Wizard Quant would persist in developing core competencies in technology, talent and investment strategies with an innovative, open and progressive mindset.

A primary focus on strategies

Based in Shanghai, Wizard Quant owns over 150 employees and manages assets nearing 20 billion yuan by the end of 2022.(As of November 2023, Wizard Quant has expanded its team to 180 employees and its AUM has surged to 35 billion RMB.) Prior to founding the company, Mr  Feng’s remarkable career included as a fund manager at global investment institutions like SAC and BNP Paribas. Wizard Quant’s key investment strategies focus on stock investments, Commodity Trading Advisor (CTA) strategies, and mixed strategies.

Feng expressed the company’s commitment to combining science and finance through advanced quantitative research and development. By leveraging powerful backtesting platforms, cutting-edge trading systems, and tech-driven insights, Wizard Quant aims to decode the market discipline for long-term and stable returns.

With nearly two decades of experience in the market, Feng noted, “The market is unpredictable, and I’ve yet met a strategy that consistently yields profits.” Guided by this principle, the company was founded with the philosophy of “prioritizing research development before expanding its management scope”, right from its inception.

The company’s growth path remains steady despite market fluctuations. This has ensured the firm’s resilience, maintaining stable performance even as others experienced fluctuations in the past two years.

Building competitiveness with an open mindset 

Mr Feng stated that Wizard Quant actively promotes opportunities for emerging talent and embraces an open-minded approach in seeking capable partners.

The effectiveness of quantitative investment firms rely heavily on their capacity to consistently generate and apply unique ideas and strategies. This pursuit is primarily based on strong team building. With his extensive experience in the industry, Feng has come to understand that a solid talent development program is crucial for the long-term growth.

The company’s team presently includes in-house trained partners, experienced external researchers, senior Wall Street veterans, Ivy League PhD holders, and International Math Olympiad medalists. This solid talent pyramid strengthens the team’s organization.

Typically, in quantitative investment firms, two common team structures exist: the one-large-team model and multi-manager platform. Under the development of the international markets, it is difficult to say which one is better, with both successful cases. However, considering that the multi-manager model limits inter-team communication, Wizard Quant adopted the one-large-team model since its establishment.

“In a large team,” Feng explained, “the entire team has a clear understanding of the road-map, and what areas need refinement. These areas involve enhancing hardware/software systems, expanding our factors library and optimizing portfolio construction methods.” 

Industry irrationality raises concerns

Since the beginning of 2023, while the A-share market has been experiencing an overall rebound, there has been a continuous deepening of structural trends in individual stocks. As a result, there has been significant differentiation in the excess return rates of index-enhanced products among top domestic quantitative private fund management institutions.

According to third-party data, as of the end of March 2023, the spread between the highest and lowest returns of domestic quantitative funds with assets exceeding 10 billion RMB linked to the CSI 500 Index has shown a significant increase compared to the same period in 2022.

As China’s quantitative investment sector enters the ‘trillion era’, Feng identified 3 irrational trends warranting close attention.

Firstly, some management institutions exhibit a selection bias in presenting products. These institutions often prefer to present with a segment of their outstanding performance rather than presenting a comprehensive overview of their entire track record.

Secondly, the investors should give up the idea of “Waiting for the ship to come in”. In the first half of 2021, the stylized market presented a wealth of opportunities, with several quantitative firms recording significant excess return from May to August of that year. Despite many managers returning these excesses after the market’s August shift, some investors continued to inefficiently allocate their time and money with them. It’s essential to view the market and managers from a growth perspective, employing stop-loss strategies when necessary.

Thirdly, abandon passive strategies that advocate inaction. As the industry’s excess return becomes increasingly hard to obtain, some quantitative managers choose to purposely reduce their product’s volatility, entering into a ‘hibernation state’ — striving to avoid substantial losses even if efficient market opportunities cannot be effectively captured.

As the saying goes, ”Smooth seas do not make skillful sailors”. Feng said that quantitative investment institutions needed to bravely confront risk.“Only by shouldering significant risks, such as price volatility and market risks, can these firms stand a chance to yield corresponding returns without wasting the cost of investors’ time.”

Feng projected a decrease in future over-performance of quantitative investment because of market saturation as the era of dividends from such strategies comes to an end. He anticipated that all quantitative firms would universally face the challenge of maintaining competitiveness.

The future profitability of managers will depend on their investment and research prowess, talent cultivation, and technological progression. Detail-oriented strategies will be key for competitive edge. Wizard Quant is set to significantly boost its investments in technology and research to ensure steady and reliable returns for investors.