Chinese Managed Futures

EMS:
Absolutely, Matt. So to kick off the conversation, tell us a little about the firm and how you got to where you are today.

MB:
Yeah, certainly. I've been in the commodity space for about 20 years. We started exploring the opportunity in China about five years ago, and we really knew there was an opportunity in China. We just didn't know exactly what it was. Clearly there's a lot of futures markets in China, there's a lot of capital in China, but there's capital constraints. So it's very challenging getting money into China and getting money out of China. So we started really looking at the opportunity in 2017, 2018. We made some trips to China to meet with the key players, the exchanges, the prime brokers, the technology, just to get feedback from mainland investors and traders over there to see how their market was relative to the US market. What we discovered is there is a lot of money in China that can't leave China and there's an appetite for Western alpha.

So what we've done over the last couple years, starting in 2018, is we have brought the alpha to China to trade the Chinese futures markets with mainland capital. There's been a couple fits and starts, and we've also consulted with some non-China money to access these futures markets via Swap. And now in light of the recent regulatory changes, we're starting to do some business with QFI. Ultimately, my goal is for there be both east to west and west to east flow for both capital and strategies. So the abbreviated version is that's what we've been working on starting in 2018.

EMS:
Great. So Matt, with that being said, I'd love to hear your top of mind outlook for Chinese managed futures.

MB:
So yeah, to answer the question, my outlook, it's really like jumping in a time machine and going back to the nineties in the US market. There's a fertile opportunity, there's directional volatility. What RCM China is doing is bringing managers that have proven success, robust infrastructure, that have shown that they can add alpha in US and Europe, and we're bringing them to China and pairing them with institutional investors in mainland China.

The FIA just recently, I think in the last couple weeks, came up with volume projections in the last couple years, like in 2022, what the volumes and options were globally across all the exchanges. And I want to say either 17 or 18 of the top 20 exchanges in terms of the growth year over year are Chinese exchanges, Chinese markets. So there's really a massive opportunity for both traders and investors alike to access China.

I think really one of the most unique things about China is the non-correlation to almost all global markets. There's a number of markets that trade in China that trade nowhere else on the planet.

EMS:
Matt, very interesting. On the other hand, what are some of the greatest challenges you face or investors face when it comes to this?

MB:
Yeah, that's a great question. There's a number of trading nuances that exist in China that exists nowhere else. Clearly the obvious being the time change. I'm on Eastern Standard Time, my trade desk is on Central Time, so it's a 12- or 13-hour time difference. So a lot of money could be made or lost when most people in the West are sleeping. There's only four different order types in China. There's two different buys and two different sells. You actually have to tag your buys if you're opening or closing a position. You have to tag your sells if you're opening or closing a position. So that's very unique to China. In simple terms, if a trader is long, let's call it a hundred crude oil, and they want to get short a hundred crude oil, in the West, you just sell 200 and you reverse. In China, there's two distinct orders, one order to get you flat and another order to get you on the other side of the market.

The contract negotiations have been a little bit challenging. We're doing business with a number of institutional investors and a number of western managers, so making sure we get a fair deal for all parties. That's clearly been a challenge. There's cultural differences between the Chinese investors that we're doing business with. There's really no access to fundamental data. So thus far, all of the strategies that we've taken to market are systematic strategies that we can get a back test on. I'm pretty excited that just today, so very relevant, we signed our first deal to bring a discretionary manager to market. So we've brought about a dozen hedge funds to market since mid-2018. They've all been systematic. This will be our first discretionary ag trader that is looking to go live in China in early April. So very excited about that.

EMS:
That's very exciting news, Matt. So given that, love to hear more details on how offshore investors could access these products amid all the regulations in place.

MB:
Oh well, patience is key. There's no instant gratification. It's taken us roughly five years to get to where we are, and we've made every mistake possible. Access is really the most challenging part. We currently have a consulting and technology wolfie that we conduct a lot of business on. From an institutional investor or institutional trader perspective, you can access China via Swap. It's just very cumbersome, very costly. The fees have come down over the last couple years, but it's still, it's very expensive and it's a significant drag on performance.

Talking about my own book a little, based on the CSRC regulatory changes that happened in Q4 last year and the fact that international investors can access China via QFI, I really think that's going to be the next path. Thus far, all of our collaboration in mainland China has been with mainland China capital, bringing the alpha to a lesser extent, negotiating at ISDA with some pension funds. We have helped a couple family offices get set up, Elana, with wolfies, and that seemed to be the clearest path a couple years ago. I do think moving forward, it's going to be QFI, and RCM China about three weeks ago partnered with two institutional players, OP out of Hong Kong and Grow Investment Partners that has a presence in Hong Kong and Shanghai. And we are working on that solution via QFI to help bring international investors and international CTAs to market. I really do think that's going to be the most consistent path in 2023, in 2024.

EMS:
Matt, we've covered a tremendous amount of ground today and very exciting about all the initiatives in the pipeline. So I wanted to see if you have any final thoughts you'd like to share with us.

MB:
RCM China is going to continue to grow our mainland business. Thus far, again, we've brought alpha to mainland capital partners. I think the next iteration will be connecting the dots and bringing that international capital via QFI to those proven alpha sources. My job is to consult with global investors and global CTAs that have a penance or appetite for Chinese futures. And, again, connect all the dots.

Through my partnership with OP and Grow, we do expect to expand into other asset classes. This will not be a day one occurrence. Initially, our mandate is CTAs and get exposure to the commodities market in China. But I do believe in the latter part of '23, we will expand into equities and we will expand into convertible bonds. So why I bring that up, for international investors that are looking for a multipurpose vehicle with multiple asset classes, I do think RCM China together with OP and Grow will have that solution over the next nine to 18 months.

EMS:
Matt, I want to thank you so much for sharing your perspective with our listeners.

MB:
I am very excited to be here as well and get our message out. I really think it's a phenomenal opportunity. I've been in the commodity space for about 20 years. A quarter of that, believe it or not, the last five years, been in China, and I really believe over the next five to 10 years, it's one of the best opportunities out there for traders and investors.

EMS:
Thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics, and join us for our next EisnerAmper podcast when we get down to business.

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