Krane Funds Advisors has launched a new ETF focused on the China A-Shares market. China A-Shares are Chinese stocks listed locally on the Shanghai and Shenzhen stock exchanges. The KraneShares China Alpha Index ETF (KCAI) is listed on the NYSE and tracks the Qi China Alpha Index, which seeks to outperform the CSI 300 Index by applying a systematic machine learning approach.
The firm has teamed up with sub-adviser Quant Insight (Qi) which has created what it calls an “alpha optimisation filtering process.” The process is combined with proprietary artificial intelligence technology to generate trading signals and identify potential sources of alpha. Individual stocks are capped at 5 per cent of the total allocation and the index is rebalanced every month. The fund has a 0.79 per cent expense ratio.
Quant Insight’s technology has been used to create custom systematic basket products for asset managers and institutional investors. Through their work with KraneShares, the two firms have figured out how to use it within the ETF structure.
This might seem like a lot of firepower to add to an ETF. A custom systematic strategy like this relying on proprietary technology probably would’ve launched as a hedge fund five or 10 years ago, but Mahmood Noorani, CEO at Quant Insight says they thought the ETF market ultimately made more sense.
“The hedge fund space is incredibly concentrated and the barriers to entry are high. So, if you want to build something that is sustainable it can be very challenging,” he says. “We could leapfrog all of that with the ETF and start building a track record and reaching out to investors on day one.”
Noorani adds that the China A-Shares market is well suited for a systematic strategy in part because there are a lot of conflicting dynamics that the program can track for the kind of dislocations that typically lead to outperformance.
“China’s A-Share market is a prime candidate for this strategy. Our research shows it has inefficiencies and volatility. It is also dominated by retail investors. This creates significant market ‘noise’ which is an opportunity,” he says.
Brendan Ahern, KraneShares’ CIO, says that the strategy is in line with KraneShares’ existing range of China focused funds and the firm’s analysts will be available to provide thought leadership to investors and advisors to go alongside the strategy.
“The fund is already out of its seed capital in a very short time period so that speaks to the demand for exposure to these stocks in a way that is both intelligent and differentiated,” Ahern says adding that there has been early interest from advisers, institutional investors and retail investors.
The past few years have been challenging for China A-Shares. The market is fractured and can be reactive to news. There are also ongoing worries about headwinds in the Chinese economy like the slow-moving crisis in the country’s property sector. The start of this year was marked by a sell-off that started on the Shanghai and Shenzhen Stock Exchanges, but eventually spilled over to Hong Kong and US-listed China ADRs. By August, foreign asset flows to Chinese stocks were on pace to negative for the first time since Stock Connect launched in 2014.
However, some investors are looking to this time as an opportunity to capture dispersion in stock prices that could generate alpha. Noorani notes that the ETF structure can provide access to A-Shares while mitigating some of the risks that come from investing in these countries directly and at a lower cost than traditional active management.
“We are already starting to see hedge funds add to their China exposure,” he says. “Our strategy is designed to provide that exposure and extract alpha from it.”
