Jason Hsu

Jason Hsu is the founder and CIO of Rayliant Global Advisors and co-founder of Research Affiliates, where he helped create the fundamental indexing methodology that now underlies trillions of dollars in assets globally. At Research Affiliates, Hsu worked alongside Rob Arnott to develop the RAFI index series, which weights stocks by fundamental measures like revenue, cash flow, dividends, and book value rather than market capitalization. After building that franchise, he founded Rayliant to focus on a market he believes offers the richest opportunity for active management anywhere in the world: China's onshore A-share market.

On this episode, Jason talks with Brad about why China's A-share market is structurally different from every other equity market, how Rayliant exploits those inefficiencies with a team on the ground in mainland China, and what most US investors get fundamentally wrong about Chinese equities.

Why China A-Shares Are Different

Hsu makes a detailed case that China's onshore A-share market is the most inefficient major equity market in the world, and not for the reasons most people assume. The market is dominated by retail investors who account for roughly 80% of trading volume. Institutional participation is still relatively small compared to developed markets like the US, where institutions drive the vast majority of volume. This retail dominance creates persistent behavioral anomalies: stocks with lottery-like characteristics (high volatility, low price, speculative narratives) trade at enormous premiums, while boring, profitable companies with steady cash flows trade at significant discounts.

Hsu notes that the academic evidence for factor investing in China A-shares is overwhelming. Value, quality, and low volatility factors have delivered alpha that is two to three times larger than what those same factors deliver in the US or Europe. The reason: the retail-dominated market systematically misprices securities in ways that patient institutional investors can exploit. But most global investors don't have the infrastructure, local knowledge, or regulatory framework to access A-shares directly and effectively. Rayliant was built specifically to bridge that gap, combining Western quantitative rigor with deep local market expertise.

How Rayliant Accesses the Opportunity

Rayliant has a research team based in mainland China with deep local market knowledge. They combine quantitative factor models (similar in spirit to the Research Affiliates fundamental indexing methodology Hsu helped build) with local market intelligence that only comes from being on the ground. The firm uses signals like earnings revisions, fund flow data, and sentiment indicators that are specific to the Chinese market microstructure. Hsu points out that many quantitative signals that work well in the US don't translate directly to China, and vice versa. The market's plumbing is different: different trading mechanics, different investor behavior, different information flows. You need researchers who understand those differences at a granular level.

Their ETF products provide access to China A-shares through various approaches, including pure quantitative China equity strategies and broader emerging market products that include significant A-share allocations. Position construction combines factor tilts with risk management overlays designed to control for the higher volatility characteristic of Chinese equities. The portfolio typically holds a diversified set of A-share names with systematic rebalancing based on factor signal updates.

What US Investors Get Wrong About China

Hsu pushes back forcefully on the common narrative that China is "uninvestable." He acknowledges the geopolitical risks and regulatory uncertainty but argues that those risks are already priced into valuations, often excessively. Chinese equities trade at single-digit price-to-earnings ratios in many cases, which implies a level of risk that Hsu believes far exceeds the actual probability of worst-case scenarios materializing. He draws a parallel to investing in US equities during the 2008-2009 financial crisis: the risks were real and scary, but the valuations more than compensated for them, and investors who stayed disciplined were rewarded enormously.

He also addresses the VIE (Variable Interest Entity) structure concern that has kept many institutional investors on the sidelines. While VIE structures do create legal ambiguity around foreign ownership rights, Hsu points out that the Chinese government has had multiple opportunities to invalidate these structures and has repeatedly chosen not to, because doing so would destroy the foreign capital flows that China still needs for its economic development. The risk isn't zero, but Hsu argues it's priced as if it's a certainty, which creates a significant opportunity for contrarian investors willing to look past the headlines.

Key Takeaways

• Hsu co-founded Research Affiliates with Rob Arnott and helped create the RAFI fundamental indexing methodology before founding Rayliant to focus specifically on China's onshore A-share market.
• China's onshore market is dominated by retail investors (roughly 80% of trading volume), creating behavioral anomalies that make value, quality, and low-volatility factors two to three times more effective than in developed markets.
• Rayliant maintains a research team based in mainland China that combines quantitative factor models with local market intelligence, recognizing that many US quant signals don't translate directly to Chinese market microstructure.
• Chinese equities trade at single-digit P/E ratios in many cases, which Hsu argues prices in worst-case geopolitical scenarios that far exceed their actual probability of occurring.
• The Chinese government has repeatedly chosen not to invalidate VIE structures because doing so would destroy foreign capital flows that remain important for economic development.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.