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B. G., Opalesque Geneva:
Many well-known CTA groups have been investing in the China onshore commodity futures market opportunity as soon as it was possible. And foreign fund participation in this market is growing anew. One among them is Eagle, which has been active in the field for over 30 years.
Eagle saw its first days in Princeton with founder Menachem Sternberg. It is now a $750m multi-strategy quantitative futures management firm with offices in the US and Israel, specialising in quantitative strategies with a focus on futures contracts, and running several CTA programs. In 2014, its subsidiary Eagle Labs was among the first managers to launch a domestic onshore China futures strategy.
The strategy
The Eagle China Futures Strategy is a multi-strategy quantitative investment program focusing on Chinese commodity futures. It combines multiple trading sub-strategies deploying trend, momentum, mean reversion, relative value and pattern recognition techniques.
From launch in October 2014 to April 2024, the $150m strategy annualised 12.5% net - compared with 4.6% for the SG CTA Index and 12.3% for the S&P 50 Total Return - with a volatility of 12%.
There is a strong focus on risk management which shows in relatively low drawdowns and a high Sortino ratio (a measure helping to assess the downside protection of a strategy by putting the returns in relation to the downside deviation only) of over 2. Another indicator is the results in February 2024, when some quantitative managers with a China focus lost double digits but Eagle Labs contained the losses to under 2%. The strategy is currently nominated in the HFM APAC performance awards 2024 (Long term (5 years) - Macro, Futures, Fixed Income & RV). An important reason for the strong focus on downside risk is the alignment of interest between investors and Eagle Labs since the manager has significant proprietary funds invested in the strategy alongside its investors.
The strategy was originally only offered to Chinese onshore investors through a partnership with a Shanghai-based investment management firm. Now offshore investors (i.e. non-US investors) can participate through the Cayman-based Eagle China Fund as well as managed accounts leveraging Eagle's QFII license.
The China futures opportunity
China's futures market started more than 30 years ago and consists of multiple futures exchanges (Shanghai Futures Exchange along with its subsidiary Shanghai International Energy Exchange, Zhengzhou Commodity Exchange, Dalian Commodity Exchange, China Financial Futures Exchange and the new Guangzhou Futures Exchange). As the country is a big raw materials buyer, the exchanges are dominated by commodity futures rather than financial futures. Correlation with global futures markets is low for futures traded in China only (such as bitumen, apples or peanut kernel) and even between contracts traded both in China as well as globally, for example, soybeans or corn.
Some investors tend to avoid China for fear that the regulatory environment could change at any time or they might be presented with issues around moving money out of China. Eagle Labs is aware of the risks and aims to manage and mitigate them as much as possible. In terms of market interventions Chinese regulators focus on equity markets and Eagle Labs never had issues moving money in and out of the country. As Gil Sternberg, Chairman and CIO of Eagle Labs explains, Chinese regulators want liquid and globally respected futures markets as it benefits their economy, and they try to avoid any actions which might scare overseas investors off.
Many investors however see the opportunity of investing in the Chinese futures markets. For over a decade, foreign hedge fund managers have been trading Chinese markets in various ways. They were often running commodity futures programs because there were no restrictions on short selling, according to the FIA, a global trade organisation for the derivatives markets.
According to Gil Sternberg, there is a revival in the appetite for commodities trading today due to inflation and dislocations in global markets. Which is adding to the attraction of the Chinese futures markets.
Foreign participation in the Chinese futures markets is growing due to the attractiveness of the market and also partly due to the latest QFII (Qualified Foreign Institutional Investor scheme) and RQFII regulations which increased investment scope and removed some of the onerous requirements for managers.
It is also made easy by the active exchanges, three of which are in the global top 20, trading large volumes of contracts, as indeed 18 out of the top 20 worldwide commodity contracts by volume are traded on Chinese exchanges.
According to Chenfan Wang from the Wuhan University of Technology, there are more retail participants in the domestic futures market, the proportion of speculation is large, and the proportion of corporate and institutional customers is low. In contrast, foreign futures market participants are mainly institutions.
"From the beginning, especially in 2014, (China's futures market) was similar to the US in the 90s," says Gil Sternberg. "There were prolonged trends with constraint volatility as the country experienced substantial growth. Today, the markets are still attractive, but we believe that a multi-strategy approach is better suited to generate attractive returns than an approach purely based on trend following. We keep evolving and adjusting to changing markets."
"China wanted a very active futures market that would allow them to hedge," he continues. It has become the largest derivatives market in the world by traded volume, largely driven by retail investors and social networks. This causes a lot of volatility, benefiting active managers. Furthermore, the markets are very liquid and continually issue new contracts."
These factors, namely low correlation, liquidity, volatility and access, make it an attractive market for systematic futures programs.
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