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Tuesday, May 7, 2019

Quant 'Goddess' Says Global Fund Giants Can’t Beat Her in China

Bloomberg News
May 7, 2019, 12:00 AM GMT+8 Updated on May 7, 2019, 8:42 AM GMT+8

Li Xiaowei has consistently outperformed China’s stock market

‘I don’t think they can do any better than us,’ she says

As China opens its $15 trillion asset management industry to the world, some of the biggest names in quantitative investing are racing to put money to work.

Li Xiaowei has a nearly 10-year head start.

Li Xiaowei
Source: Fullgoal Fund Management Co.

Known in local trading circles as the “goddess of quants,” the 49-year-old Stanford Ph.D. started China’s first enhanced index fund in December 2009 and has trounced the market by 56 percentage points since the product’s inception. She sees little reason to worry about losing her edge as overseas giants from BlackRock Inc. to D.E. Shaw & Co. expand in China.

“Foreign institutions are quite sophisticated,” said Li, who joined Shanghai-based Fullgoal Fund Management Co. after three years as head of Greater China active equity investment at Barclays Global Investors in San Francisco. “But in enhanced index funds, I don’t think they can do any better than us.”

Li, one of the most high-profile Chinese money managers to return home after working for a major international investment firm, has spent a decade honing an approach that beat the benchmark index in all but two of the past 10 years. Her confidence underscores a sometimes overlooked challenge for overseas quants who view China as an inefficient market ripe for the picking: The local competition is nothing to scoff at.

In an interview at her office in Shanghai’s Lujiazui financial district, Li discussed the state of China’s 300 billion yuan ($45 billion) quant industry, the development of the country’s capital markets and her experience as a woman in the male-dominated world of asset management. Comments have been edited and condensed.

On the growth of quant funds:

Ten years ago, there was no quant investing in China and even institutional investors had no idea what it was. I joined Fullgoal in June 2009 and we had to issue our first product by December. I repeated the same presentation again and again and told investors everything, but they still didn’t understand. Now when I talk to investors, I no longer need to explain. All the top insurers understand the concepts perfectly and they have at least one department devoted to quant investing. I’ve seen growing interest in enhanced-index funds in the past two to three years.
Competition with global investors:

We aren’t much behind in terms of data and techniques. The real gap is the market infrastructure and environment, including where we can invest and how we invest. It’s not about right or wrong, outdated or more advanced. It’s an ecosystem that’s appropriate for China, for now.
Outperforming in China:

There are three core things you should care about: extra return, the sources of extra return/risk, and liquidity and transaction costs. The costs are certain, but alpha is not. You need to accurately measure your trade-off and factor that into your model. What you really need is stable alpha.
Exchange-traded funds:

I have managed two ETF funds since 2011. China’s ETF market is expanding because it has many advantages over stocks. More institutional investors find them to be great tools and convenient to trade.
Being a female fund manager:

I never considered that a challenge. In quant investing, it’s your ability and expertise that talk. If you are capable, nothing else matters. It’s quite simple. I majored in economics and I’m more into microeconomics and econometrics. When I graduated from Stanford, the usual route was to work for the International Monetary Fund, where I have interned. But I felt it was hard to relate to macro issues. I prefer things that are visible and touchable. My PhD thesis was about applying econometrics to European stocks.
Her future:

I am very happy here. I built the team from scratch. If someone starts their own firm, the process wouldn’t be much different. But there are so many other things to worry about. It’s not just about delivering good returns. What I want to focus on is investing itself.

— With assistance by Jun Luo, and Amy Li

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