Types of Investors in Chinese Assets – A (Not So) Brief Overview

Just like with pretty much any other asset class, there is immense variety when it comes to categories of market participants who invest in Chinese assets. You can think of this article as an exercise with respect to getting to know your fellow market participants, it is ultimately up to you whether you see it as studying the proverbial ecosystem or getting to know your enemy.

As such, without further ado, we will start digging deep right from the beginning, with the important remark that the list we are putting forth is by no means definitive (exhaustive, yes… definitive, no):

1. The perma-bull or cheerleader investor, someone who believes Chinese assets can only go up and who will quickly be able to think of talking points to counter anyone who dares believe otherwise. He loves demonizing the proverbial West, with its unsustainable development and firmly believes that China is the future on the one hand and on the other hand, that the future in question is just around the corner. Needless to say, we are dealing with an investor category where emotion tends to prevail over reason, a type of investor who makes the fatal mistake of falling in love with his or her position
2. The perma-bear or doom and gloom investor, in many respects the exact opposite of the perma-bull but ironically, someone who has a lot in common with perma-bulls. Perma-bears believes Chinese assets and ultimately China itself are deeply in Ponzi scheme territory, a house of cards just waiting to collapse due to a combination between reckless credit-driven growth and inefficient spending. Once again, we are dealing with a textbook example of an investor who commits the fatal mistake of falling in love with his or her position… it’s just that unlike with perma-bulls, that position just so happens to be a short as opposed to long trade
3. “Whales” as they tend to be more or less jokingly referred to or well-funded investors who put their immense capital to good use in a manner which enables them to, yes, manipulate prices short-term. Quite a bit of money can be made by leveraging the significant amount of financial firepower whales have at their disposal by buying large quantities so as to hopefully incite panic buying among other market participants or selling in bulk so as to hopefully get other market participants to panic sell. As mentioned through a fair number of previous ChinaFund.com articles, however, it is important to point out that while manipulating prices short-term is well within reach for a serious whale, altering the meaningful long-term trend is much more difficult… to the point of almost impossible. On a final note, we would like to point out that yes, whales can be large institutions but that is not mandatory, high-net-worth individuals can also end up being whales
4. Market makers, not to be confused with whales. These are entities such as brokerage companies which essentially connect willing buyers to willing sellers in exchange for profiting through the difference between the price they buy and sell at (the so-called spread). In Western jurisdictions, market makers are forced to comply with strict regulations, whereas in more exotic jurisdictions, they have more flexibility… which includes flexibility when it comes to potentially unethical endeavors such as trading against their clients by (mis)using the position-related information they are privileged to. Are there more risks involved in trading Chinese assets as opposed to let’s say the most robust S&P 500 stocks? It all depends on which companies you end up doing business with and it is difficult to talk in absolutes but let’s just say that yes, the due diligence process tends to be more important
5. Technology-driven scalpers, who buy and sell very quickly (to the point of placing their trading desks close to the source so as to gain a fraction of a second in terms of edge), a highly specialized category of market participants. Time and time again, “Average Joe” investors who read a book or two about scalping believe they can compete with professional scalpers, something the ChinaFund.com team strongly advises against. Simply put, the likelihood of an average investor developing a scalping edge is so low that you are better off exploring pretty much any other niche. Professional scalpers spend fortunes on technology and hiring the brightest mathematical minds available… let’s just say there are wiser approaches than trying to top that as a “lone wolf” average investor
6. Day traders, or market participants who don’t transact as frequently as scalpers but still, one can expect them to initiate as well as close trades on a daily basis (as the name alludes to). Needless to say, a day trader cannot afford to be a perma-bull or perma-bear in light of the fact that his business model revolves around successively buying and selling. Does the ChinaFund.com team recommend day trading? For the average individual, not quite, in light of the fact that study after study proves that “Average Joe” day traders ultimately lose money due to not being able to develop an edge. Even brokerage companies that advertise day trading-related opportunities are compelled by law to display statistics on their banners or other ad types which make it clear that most traders lose money. While not impossible, turning day trading Chinese assets into a profitable endeavor is… well, unlikely
7. Swing traders. Just like day traders trade less frequently than scalpers, swing traders buy and sell Chinese assets less frequently than day traders. As such, a swing trader is a market participant who doesn’t feel compelled to let’s say engage in transactions multiple times each day or even once daily. Instead, a swing trader feels more than comfortable limiting himself to a trade per week, a trader per month and so on. The ChinaFund.com team tends to consider swing trading an option superior to day trading for the average individual in light of the fact that, especially if low or even no leverage is used, there is a lot more wiggle room and such, the likelihood of being shaken out by whale-generated short or long squeezes is quite a bit lower
8. Position traders or, you’ve guessed it, market participants who transact even less frequently than swing traders. While a swing trader transacts frequently enough for us to state that it’s (still) important to be emotionally agnostic (neither too bullish nor too bearish for let’s say “ideological” or conviction-related reasons), position traders might only open/close a trade once per year or even embrace multi-year positions. As such, the likelihood of a position trader also being a perma-bear or perma-bull is higher than with swing traders, just as that likelihood is higher with swing traders than day traders

Broadly speaking, we believe we have our bases covered but again, the list is by no means definitive. Our main goal with respect to this specific article revolves around jump-starting the imagination of our viewers, with the sky being the limit with respect to investing and/or trading-related approaches. Not only do we not consider this list definitive, we would actually wholeheartedly invite those who follow our work let their imagination run wild when it comes to possibilities for them to develop an edge as traders, as investors or… preferably both.

These investor types can also be found with pretty much all other asset classes but, of course, there are particularities you need to be aware of when it comes to Chinese assets, particularities which will be covered through future articles or, of course, which can be discussed in private should you or your organization be interested in our consulting services. As a general rule, more information about our services can be found by accessing the Consulting section of ChinaFund.com, or should you be interested in getting in touch directly so as to establish a line of communication and see where that leads us, feel free to send us a message by using the interface we are putting at your disposal through our Contact page.