Quant hedge funds are being hit with margin calls following the massive rally in Chinese stocks, hammering those with short positions.
Hedge funds who use shorts as part of their market-neutral strategy are now at risk of their positions being liquidated, reports Bloomberg, citing people familiar with the matter.
Last week, the Chinese government announced that it would allow institutional investors to use central bank financing to make stock purchases.
Officials said they would look at creating a market stabilization fund starting with an initial pool of 800 billion yuan – $113 billion – to be injected into equities markets.
Since the release of the news, the Hang Seng Index (HSI), which is composed of 82 blue chip companies in China and Hong Kong, has rallied non-stop, erasing 2 years and eight months worth of losses in under two weeks.
The CSI 300, which is comprised of China’s 300 biggest companies, has rallied nearly 30% since the news.
Liangkui Asset Management, which oversees about 3 billion yuan ($428 million), said that a confluence of events — such as a “rare technical exhaustion of liquidity” created chaos for the firm. In a letter to investors seen by Bloomberg, the hedge fund told investors that the margin calls delivered “the last straw on the camel.”
The firm said that when their brokerages closed their positions, the liquidations of their shorts added to the rally, putting even more upward pressure on an already-hot market.
Generated Image: Midjourney