Jane Street’s HK foray hits only a small snag

Shuli Ren, Bloomberg

At first glance, China’s scrutiny of Jane Street Group and other foreign firms that participate in its exchange-traded fund market seems like a major setback for global asset managers that have over the last year expanded their footprint in Hong Kong. But their business rationale remains very much intact.

Beijing is trying to understand trading patterns in the fast-growing $859 billion ETF industry, especially after a crackdown on Jane Street in India, Bloomberg News reported. Last year, New Delhi accused Jane Street of market manipulation, prompting the trading house to cut its exposure to the country and ramp up activities elsewhere in Asia. As of June, the company was China’s largest foreign ETF market maker, but accounted for less than 2% of overall trading.

So what happens to the millions of dollars global trading houses have committed to spending in Hong Kong? Last year, Jane Street and London-based multistrategy hedge fund Qube Research & Technologies Ltd. signed record-breaking leases for office space.

Going forward, the sector could come under increased regulatory scrutiny, but it’s premature to conclude therefore that global hedge funds have placed a poor bet. It’s worth asking why they are expanding in Hong Kong, as opposed to Singapore or Tokyo, in the first place.

Of course, China’s capital markets are a draw. It’s clear by now that President Xi Jinping, not known for caring about stock market returns, has changed his mind. Last year, the benchmark MSCI China Index gained 28% as state-owned pension and insurance funds bought in. Stock turnover has also jumped to a record high, a liquidity boost that is music to hedge funds’ ears. Meanwhile, the onshore quant industry is nascent, allowing more experienced global funds to exploit and profit from arbitrage opportunities.

But more important than China’s market access is its human capital. Hong Kong, thanks to its proximity to the mainland, gives global funds an edge in an increasingly heated talent war.

China is coming to the rescue. Thanks to Xi’s focus on higher education, the country boasts a vast, young and cheap engineering talent pool, just the kind that quant hedge funds love. Even trading desks that conduct fundamental research prefer analysts who can work with big data and capture hidden signals, in a growing trend known as “quantamental” investing.

Employing people from the mainland in Hong Kong is a breeze. Any recent graduate from one of the 23 Chinese universities, most of which are known for their STEM programs, can immigrate and work in the city. By comparison, Singapore has tightened its work visa requirements in recent years.

A Tsinghua graduate with three years of work experience can expect to make 238,188 yuan ($34,144) on average, according to Zhaopin Ltd.

Amidst a global talent war, a hard-charging shop can deploy a barbell strategy, paying a few star traders astronomical amounts while going safe with the rest. And it just so happens that China’s education system produces enough of these diligent worker bees.

Think of what Jane Street needs: Capital, talent and market access. For the behemoth, which made $24 billion in nine months last year alone, its office investment in Hong Kong is worthwhile as long as it can hire from China. These employees, in turn, can trade all assets across all time zones. Access to the country’s bourses is merely the icing on the cake.

Jane Street’s China foray has only hit a tiny speed bump, at most. [Abridged]

Courtesy Bloomberg/Shuli Ren