The hedge fund's meteoric rise is now being called into question after US prosecutors accused Zhang of stealing trade secrets from his ex-employer. — Bloomberg
SHANGHAI: In China, Xiao Zhang’s two-year-old quantitative hedge fund has been a standout in an industry struggling with falling returns.
Its meteoric rise is now being called into question after US prosecutors accused Zhang of stealing trade secrets from his ex-employer.
Zhang’s Pinestone Asset Management Co shot to fame locally earlier this year as one of the rare winners from China’s “Quant Quake”, helping it more than double assets under management to 10 billion yuan in a few months.
The Shanghai-based firm emerged relatively unscathed from a collapse in small-cap stocks in February that sent many rivals’ strategies haywire.
Its head of trading said Pinestone’s “self-built” trading system protected it from extreme market turbulence, enabling it to cut risk quickly and sail through the meltdown.
The US charges cast doubt on that claim.
The federal grand jury indictment unsealed last week alleged that Zhang made copies of a global investment management firm’s code and projects, and that he misappropriated the information in order to use it at his own firm.
The 33-year-old Chinese citizen has hired lawyers in the United States and China, people familiar with the matter told Bloomberg earlier.
Zhang and Pinestone haven’t commented on the allegations publicly. Pinestone declined to comment for this story.
The indictment adds to other cases brought by the US Department of Justice against Chinese nationals, who are alleged to have illegally exported technology or attempted to obtain software and source code from American companies or entities.
Tensions between Washington and Beijing have been extremely high, and US authorities have long had concerns about technologies and intellectual property developed in America being used to benefit the country’s biggest economic rival.
It isn’t the first time a Chinese national has been accused of stealing trade secrets from a US quant firm.
Nearly a decade ago, Gao Kang, a former New York-based analyst at Two Sigma Investments, was indicted on charges that he duplicated electronic-trading software from his former employer.
Gao ended up pleading guilty and was sentenced to 10 months in prison.
He subsequently returned to China and founded Yanfu Investments LLC, and has emerged as one of the biggest quants in China thanks to its solid performance.
The US Attorney’s Office in Massachusetts described Zhang as being “at large overseas”. The US doesn’t have an extradition treaty with China.
Zhang, who is Pinestone’s chief investment officer and largest shareholder, has been in meetings to appease clients and distributors of the firm’s funds, according to people familiar with the matter.
The allegations could also have ramifications for the broader Chinese quant and hedge fund industry, which has long prized managers with overseas experience.
Many of China’s biggest quant funds have founders or key managers who previously worked at global firms including WorldQuant, Millennium Management and Two Sigma, according to data compiled by Shenzhen PaiPaiWang Investment & Management Co, which tracks Chinese hedge funds.
Before starting Pinestone, Zhang worked for Arrowstreet Capital, a Boston-based quantitative investment firm focused on equities, from 2015 to 2021.
His past employment dates matched the dates in the indictment, which didn’t name the global firm.
Zhang, who was also known as Sean when he lived and worked in the United States, earned a master’s degree in financial economics from Columbia University in New York after graduating earlier from Shanghai University of Finance and Economics.
A testimonial on the American university’s website under Sean Zhang’s name said he worked for Arrowstreet.
The Columbia programme “armed me with the quantitative skills and broad academic knowledge that enabled me to develop a successful career in investment management”, it said.
Arrowstreet Capital, which was founded in 1999, had around US$177bil in assets under management at the end of last year, according to a regulatory filing.
Its clients include pension plans, municipal governments, insurers, sovereign wealth funds and other institutional investors.
The firm uses proprietary quantitative models that draw from historical data and make predictions, and its research identifies, tests and incorporates investment signals into its return and risk models, the filing said.
A global equities portfolio that Arrowstreet manages for Calpers, the giant California pension fund, had a one-year total return of 25.9% and beat its benchmark by more than six percentage points, according to a Calpers performance report.
That portfolio was worth US$13.5bil at the end of June 2024.
Pinestone’s other co-founder, Wu Que, also worked at Arrowstreet, according to local registry data in China.
Zhang and Wu started building their model and trading system tailored to the Chinese stock market in September 2017, according to a brochure about Pinestone on PaiPaiWang’s website.
It said Zhang used to have a senior position in Arrowstreet’s research department, and was in charge of developing models to predict returns, risk and the trading costs of global stocks.
The indictment described Zhang’s past job differently. — Bloomberg
