(Bloomberg) -- It’s a sign of the times for algorithm-driven trading firms in China: one of the nation’s biggest quant shops advised some clients to take their money back.

Earlier this month, the marketing head at Zhejiang High-Flyer Asset Management suggested that certain clients sensitive to volatility fully redeem their money as the market is more likely to fall further than rebound, in comments which were confirmed by the hedge fund.

The unusual move underscores an increasingly challenging environment for Chinese quants as the economic fallout of the war in Ukraine accelerates a stock-market slump and some of the industry’s trades become increasingly crowded.

After gaining 20.5% last year, the nation’s 28 biggest private quants - the local equivalent of algorithm-driven hedge funds - lost 3.8% on average this year through Feb. 22, according to Shenzhen PaiPaiWang Investment & Management Co., a local research provider. High-Flyer lost 10% over the same time period, while a benchmark stock index fell 7.4%.

With China’s stock markets in free fall, quant losses may have widened further in recent weeks. Since the invasion, a gauge of Chinese shares in Hong Kong has plunged 18% in the world’s worst performance among actively traded benchmarks. The CSI 300 index is on track for its weakest quarter since 2015. 

Last year’s performance helped quant funds grow their assets almost 80% to 1.6 trillion yuan ($253 billion), according to Citic Securities Co. estimates, which are widely cited amid a lack of official data. 

The surge in assets has strained the capacity of some funds to keep returns stable in current market conditions, which is weighing on performance, Yan Hong, director of the China Hedge Fund Research Center at the Shanghai Advanced Institute of Finance, said in an interview.

“The heightened market volatility and rapidly shifting market trends are making it more difficult to adjust,” he said.

One prominent fund to buck the trend so far has been Ray Dalio’s Bridgewater Associates, which was the best performing large hedge fund in the country in the first month of the year, and held sixth place in February, in a ranking of 97 top hedge funds tracked by PaiPaiWang that’s often dominated by quants.

Bridgewater, which obtained its China license is 2018, is pushing ahead from a lower base than its biggest Chinese rivals. The asset manager in November raised more than twice as much as expected for a new private fund, bringing the onshore assets under management above 10 billion yuan, a record for a foreign-run firm. 

Some big funds are now reworking their strategies to prevent further losses. High-Flyer, which managed about 90 billion yuan as of September before assets fell, earlier apologized to investors in December after a record slump in performance and said it will adjust models and lower the concentration of stock positions.

Ubiquant, an algorithm-driven fund founded by former WorldQuant researcher Wang Chen, is seeking to diversify sources of excess returns to make a strategy which plunged 39% in January on leveraged bets more robust. The Ubiquant Asia Pacific Quantitative Hedge Fund has since rebounded with a more than 20% gain in February, the product’s operations team said.

Shanghai-based Mingshi Investment Management Ltd., which manages $2.7 billion, plans to offset the impact of what it calls “crowding” of popular trades that contributed to an 8.6% decline in January after a 28.5% gain last year. The asset manager declined to comment on February’s performance.

Hedge funds targeting similar stocks and drivers of return - known as factors in the industry - are an important reason behind the weaker performance, Yuan Yu, co-founder of Mingshi, said in an presentation streamed online on Feb. 23. That prompted his firm to upgrade its model last month to offset the impact from crowding, said Yuan, who was a research associate at the Reserve Bank of Dallas and doctoral student at the Wharton School before founding the hedge fund with his PhD advisor. 

To gain competitiveness, Mingshi said it is adding more factors from alternative data and reducing reliance on shorting the CSI 500 Index, as many rival firms do.

The industry remains split on the impact of crowding, with some players attributing the falling performance to fewer opportunities to profit from market inefficiencies. According to Ubiquant, the industry’s rapid expansion and the decline and sudden shifts in the market were bigger factors.

“We don’t like crowding,” Mingshi’s Yuan said, adding that his firm’s latest measures “make us more comfortable.”

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