Shanghai Ruitian Investment LLC, a top Chinese quantitative hedge fund founded by an ex-Citadel researcher, lost a high-profile lawsuit claiming a former staff member infringed its technology secrets when he joined a larger rival.
(Bloomberg) — Shanghai Ruitian Investment LLC, a top Chinese quantitative hedge fund founded by an ex-Citadel researcher, lost a high-profile lawsuit claiming a former staff member infringed its technology secrets when he joined a larger rival.
The case centered on Ruitian’s former head of high-frequency trading strategy, Yang Yunhao, who joined Zhejiang High-Flyer Asset Management. The Shanghai First Intermediate People’s Court supported an earlier ruling that Ruitian should pay Yang about 3.5 million yuan ($495,000) in economic damages including for a non-compete agreement, and rejected the firm’s other requests on appeal, according to court documents released this month.
The court also overthrew an earlier order for Yang to pay Ruitian 4 million yuan for breach of contract.
The final ruling promises to end a legal battle between two of the nation’s best known quants that highlighted the cutthroat competition for top talent. Managers are seeking to expand in the 1.6 trillion yuan industry by constantly upgrading algorithms to keep their products attractive.
Rivalry among quants has reached a point where any strategy’s alpha would keep falling every year, putting pressure on managers to develop new ones, Ruitian’s founder and Chief Executive Xu Xiaobo told a forum last month in Yangzhou of Jiangsu Province.
“Technology development is the core competitiveness of quantitative investment managers,” Ruitian said in the court document posted May 15 on China Judgements Online. Yang’s move to High-Flyer led to losses and the destruction of competitive edge that can be “measured in hundreds of millions of yuan,” it said.
Ruitian didn’t immediately reply to a request for comment. Yang, 32, couldn’t be reached for comment. High-Flyer declined to comment.
Ruitian, founded in 2013 by Xu after he left Citadel in the US, said Yang possessed quantitative strategy codes that amounted to “core commercial secrets.”
It also sought 5 million yuan in compensation in a separate unfair competition case, according to a February document. While that suit hasn’t reached its final verdict, the court’s recent ruling supported High-Flyer’s statements and noted that Ruitian had no evidence to prove Yang violated his non-compete commitments.
High-Flyer said at the time that its hiring process was prudent and compliant, and the relevant employee joined only after the non-compete obligations ended.
The litigation has shed rare light on the profitability of quants and the huge price they’re paying in the talent war. Ruitian gives millions of yuan a year to recruiters, and research-related costs like data and servers exceed 10 million yuan annually.
The company signs “strict” non-compete agreements when it hires strategy development staff, and pays them non-compete compensation that’s equivalent to salary after they leave, in order to prevent leakage of secrets. Such talent and the strategy codes are “the core” of Ruitian’s commercial secrets and losing them could be “catastrophic” to the company, it said in the court document.
Ruitian, which manages close to 10 billion yuan, paid Yang a combined 16 million yuan over three years, including a 7 million yuan bonus in 2019 for the profit his team contributed, according to the court. Yang claimed his 2020 bonus should be 22 million yuan before tax as his team made more than 500 million yuan that year for Ruitian, while the company only paid 2.5 million yuan after tax, leading to a dispute that culminated in his departure.
In a more dramatic episode, Yang said Ruitian tried to prove he poached two former colleagues, who resigned from his department shortly after his departure, by secretly videotaping him in April 2021 when they appeared in the same building with him. Xu even showed him the footage along with notes detailing his whereabouts.
Yang said he was just attending online Harvard University courses there while the two former colleagues visited to chat. The recording was insufficient to prove any role Yang played in the other resignations, the court ruled, while Ruitian denied secret videotaping.
China’s quant hedge funds managed an estimated 1.6 trillion yuan in assets as of March 31, up about 3.5% from the start of the year, according to a Citic Securities Co. report this month.
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