Adam: Why don't we start with the origins of Bond Trust. It doesn't have the typical back story of a fund in that it actually began as an exchange. Could you tell me a little about that?
Charles: Definitely. The history is not as straightforward as you typically encounter for an asset management or global hedge fund entity. Essentially, I was working for Deutsche Bank until the year 2000. At Deutsche Bank I was running a securitisation finance book for Asia. After I left Deutsche Bank I did quite a few things, including investing in a few internet companies and education companies. So, after a few years I decided to start a boutique, an advisory firm; that was 2002. I started Bond Trust because my background was in fixed income, trading, research and origination. I was advising a few property developers in China on how to raise money from outside China at the time. Over the years, we did quite a good business on the advisory side. But as the company grew, we figured out we wanted to get into mainland China, because Bond Trust at that time was based in Hong Kong. It's an SFC (Securities and Futures Commission) licensed company in Hong Kong.
I was looking for opportunities - back in 2004, 2005 - for how to get into China. There's a lot of regulation and it's very difficult for a foreign company to get into China directly. I'm actually a native of China myself. So I bought a company which was a metals exchange in China before, and we established an office in China that way. As we got into China, we looked at the onshore markets and decided the asset management business would be the main business we wanted to focus on. We looked at how to utilise international expertise and technology within China, and quantitative trading and asset management was really the area we pushed for. We learned quite a bit over the last few years, in terms of the landscape of the market. That's the history regarding Bond Trust and how it got into China.
Adam: Interesting. So it was actually easier to buy an existing company, even though it wasn't an asset management company, than to start a new one. Is that a regulatory issue?
Charles: It wasn't a regulatory issue per se. But it is more difficult to start a business in China, and if it doesn't have a lot of history then you typically cannot do the asset management business easily.
Adam: So Bond Trust is a mainland China-based business, it's not based in Hong Kong?
Charles: Bond Trust is an SFC-licensed company in Hong Kong. We have an affiliated company, Bond Trust Consulting, which is in China. By law we cannot have an international company directly own an onshore company in regulated businesses. As I'm Chinese myself, I own the onshore entity.
Adam: In 2010 you announced a new alpha generation platform. Could you tell us a bit about what that platform does?
Charles: We developed some strategies ourselves over the years in China, then we decided how to make it into a more efficient backtesting, forward-testing and real time execution platform. We developed the script language which enables us to do that, and then later on we actually combined the platform with Deltix, which is a US-based company.
The quantitative trading based in China is very new. It's almost like a new frontier. People in China typically do not believe in quantitative strategies or automated trading at all - because many traders make their money by, sadly, inside information or manipulation of the stocks. So they say quantitative strategies don't really work; very few investors employ quantitative strategies. I had to go pretty much from the ground up, by getting the market data, cleaning the data, having a backtesting platform, trying to get an execution connection with the exchange, and with the broker's platform. All these things pretty much needed to be done from scratch, because there's not really much infrastructure in China in this space. We spent almost a year and a half doing this.
Adam: What you're doing is somewhat rare in mainland China. When you mention strategies, are they multiple asset classes? What kind of strategies are we talking about?
Charles: In China, the things you can trade are rather limited. There are not really options at all. You effectively cannot borrow stocks. And also stocks are traded on T+1 so you cannot buy and sell in one day. Also the transaction costs are very high. On the selling side for stocks there's a 10 basis point stamp duty. The brokerage commission each side is five basis points.
Adam: So with all that, there's no chance for HFT.
Charles: The only place where you can really do HFT is the commodity exchanges. There are three commodity exchanges in China. One is in northern Dalian, there's central Zhengzhou and there's Shanghai. There's also another financial futures exchange, which is stock index trading - that's about one year old now. So with these four futures exchanges, potentially you can utilise HFT strategies. However, the regulators don't really like to see it. They limit the number of times you can trade in one day, so effectively you cannot turn over too much. There are people trying out HFT a little bit, but it's not really on a large scale, not like ultra-high frequency. And on the market data side, it's very slow. For stocks, level two data only comes every two or three seconds, and there's no order ID either. There are a lot of impediments in terms of fast moving markets or trading costs, and so all of this is preventing HFT strategies.
Typically, what we trade will have to go anywhere from a few days to about a month. We have developed a strategy which arbitrages between stock indexes and the underlying stocks and also another one is ETFs with underlying stocks. We also have a lot of strategies which are more traditionally like factor model, alpha model strategies.
Adam: What sort of alpha generation are we talking about here?
Charles: We're talking about traditional factor models which analyse the value, the growth, momentum or mean reversion, the size of the company and then we sometimes incorporate some local news as well.
In China, 70 percent or 80 percent of trading is done by retail. Only 20 percent is done by institutional. And all these traders are influenced by information, by news flows. A lot of times you can't just simply play by the value or growth factors. You've got to really figure out what events are happening and how to adjust a position based on the events. Those sorts of things have to factor into the traditional alpha strategies.