China’s quantitative hedge funds are grappling with increased margin pressures as the country’s largest stock market rally in over a decade continued during trading on Monday, according to a report by Bloomberg News.

The repot cites unnamed sources familiar with the situation as highlighting that funds employing market-neutral strategies – those that short index futures while holding long positions in individual stocks – were hit with additional margin calls as Chinese shares continued their upward climb on Monday. Although the scale of these requests was smaller compared to Friday, when a trading glitch made it challenging for funds to raise cash, the mounting pressure has been palpable, said the sources.

Some fund managers have informally approached regulators to request more time to meet margin requirements, highlighting the severity of the strain. While many funds managed to meet initial margin calls before the extended deadlines, they did so to avoid the risk of forced liquidations.

The past week has been tough on market-neutral products, which saw declines of 3% to 5% as the broader market surged. This downturn represents a setback for quantitative funds still recovering from the February market rout.

Liangkui Asset Management, which oversees approximately 3 billion yuan ($428 million), cited a “rare technical exhaustion of liquidity” in the Shanghai Stock Exchange as one of the key factors that triggered Friday’s chaos. As some clients failed to add required margin, brokerages moved to forcibly close out short index futures positions, causing a ripple effect that further propelled the rally in index futures, the firm said in a letter to investors seen by Bloomberg. Liangkui Asset recorded a drawdown between 1.5% and 2.5%, according to the letter.

The struggles faced by these quant funds are in stark contrast to the broader market’s performance. The benchmark CSI 300 Index surged by 13% since Friday, marking the largest two-day advance since September 2008.

https://www.hedgeweek.com/quants-face-additional-margin-pressure-amid-ongoing-chinese-stock-surge/