Shanghai-based QStrategy Network Technology is preparing to raise a Series A financing of Rmb20 million to Rmb30 million ($2.9 million to $4.3 million) in order to support its ambitions to take its quantitative investment business outside of China.
Li Loki, CEO, told DigFin the startup has just launched its robo-advisory platform, QuantsGeek, which provides computer-driven advice, trading and execution of 30 model portfolios for global equities.
The service went live in mid-March and now has around 500 individual customers, who on average invest the equivalent of $20,000 each with QStrategy. The minimum investment size is $1,000. QStrategy needs to grow to 15,000 customers before it breaks even, Li says.
The company receives a subsidy from the Hangzhou municipal government to cover operating expenses; Shanghai Reaching Venture Capital’s Linhui Fund is also a seed investor. Additional funding is to help it grow an investor base in Hong Kong and Malaysia’s Chinese-speaking community.
Quant strategies have become a large part of China’s mutual funds industry. According to Bloomberg News, there are 141 quant equity mutual funds in China, with assets of Rmb85.8 billion, rivaling the Rmb200 billion held in traditional equity funds. Some of the quants have emerged in the past two years as among the top performers in China.
QStrategy is different in that it is developing quant strategies for international equity markets, not domestic ones. Li says China’s slowing economic growth and the strong performance of foreign stock markets such as in the U.S. will entice new investors, particularly younger people with disposable income but not a lot of financial experience.
QStrategy has a Hong Kong brokerage license, and trades international stocks through Interactive Brokers and Just2Trade, two U.S.-based online brokers. These foreign brokers also act as fiduciaries for end-investors’ assets.
Neural networks for global equities
He has enlisted experts in neural networks to enhance his platform’s capabilities. Neural networks deploy artificial intelligence to data analysis. The algorithms used are meant to discern patterns in the data in order to generate more accurate predictions – which in this case means generating outperformance. (QStrategy developed apps that use the infrastructure provided from TensorFlow, an open sourced library of software for maching learning, developed by Google.)
Whereas robo-advisors in the U.S. tend to invest money into exchange-traded funds, to generate low-cost beta, QStrategy needs to deliver higher returns for its Chinese investor base, not to mention meeting the costs of obtaining quota from foreign brokers for overseas investment.
“People want alpha,” Li said. “We try to generate that using artificial intelligence.”
Although the firm can incorporate ETFs into the overseas markets it covers, the alpha is meant to come from customized portfolios of stocks, as recommended by its platform’s A.I., based on an initial questionnaire meant to assess a user’s risk and return parameters, said Vera Li, chief product officer.
The company also offers leverage, up to four times on many global equity indices, and up to 20x against the S&P100 index of U.S. blue chips.
To grow its customer base, it is leveraging China’s developer community. Li Loki is involved in a large community of developers using the computer language Python, which was used to develop QuantsGeek. He has opened his code for others to use on a white-label basis, with the intention to split profits that other companies generate using his platform.
Vera Li says the company is also marketing its own content on WeChat and other digital platforms, including stock tips that are used on QuantsGeek to generate investment ideas for customers. QStrategy is also using third-party financial planners in second-tier cities to generate sales. Depending on where customers are found, the cost of acquisition is between Rmb200 and Rmb500, she says.
QStrategy does not charge a management fee. It charges a 0.3% commission. Its real money is made up in carry, taking a 20% payout from customer profits.