DeepSeek Founder's Quant Empire Navigates China's IPO Market

DeepSeek, a prominent Chinese artificial intelligence lab, has historically been financed by High-Flyer Quant, the hedge fund established by its founder, Liang Wenfeng. High-Flyer Quant utilized AI and deep learning for stock trading for years, providing DeepSeek with initial funding and computational resources.

Currently, DeepSeek is seeking external investment to support its expanding goals. Simultaneously, High-Flyer Quant has been strategically securing allocations in some of China's most sought-after technology IPOs, including those in the semiconductor and robotics sectors.

Securing shares in pre-IPO placements can lead to significant paper gains for hedge funds, especially when these anticipated stocks perform well upon their market debut. However, recent market fluctuations in AI and chip stocks have subjected funds like High-Flyer Quant to substantial losses. As DeepSeek's capital and computing needs escalate, its reliance on High-Flyer Quant may diminish, particularly given the fund's reported 'unstable' revenue, according to Ciel Qi, a research analyst at Rhodium Group. Qi notes that Beijing's initiative to encourage strategically important technology companies to list domestically presents 'lucrative pre-IPO investment opportunities' for funds, emphasizing that success in China's market increasingly requires aligning investments with Beijing's strategic directives.

Neither High-Flyer Quant nor DeepSeek provided comments in response to requests.

Trading AI Volatility

Affiliates of High-Flyer Quant, Zhejiang High-Flyer Asset Management and Ningbo High-Flyer Quantitative Investment Management, have secured private placements in key Chinese companies such as memory chip manufacturer CXMT and robot developer Unitree Robotics. Their investments also extend to companies involved in chip packaging, electronic components, and renewable energy, according to an analysis of IPO data by CNBC.

CXMT represented the largest allocation for the two funds, with combined pre-IPO shares valued at $26 million (175 million yuan), as per data compiled by Shenzhen PaiPaiWang Investment & Management, a consultancy specializing in Chinese private funds. The memory chipmaker saw a remarkable surge of over five times its initial value on its Shanghai debut in July, quickly becoming China's most valuable company, and has since experienced an additional 20% growth.

Unitree's IPO attracted investments not only from Liang's funds but also from DeepSeek itself. The two funds collectively received $5.8 million in shares, according to PaiPaiWang. In a separate arrangement, DeepSeek acquired a 2.31% stake in the offering as one of nine strategic investors, committing to a 36-month lock-up period, significantly longer than the typical 12 months undertaken by most strategic backers.

Unitree experienced a 460% surge on its Shanghai IPO day last week, though it has since seen a decline of approximately 27%, based on LSEG data. Unitree's recent downturn has highlighted concerns about how Beijing might support emerging strategic sectors without triggering speculative bubbles.

A global downturn in AI chips impacted momentum-driven quantitative trades in July, resulting in losses for eight out of nine High-Flyer Quant products, according to state-backed media. Chinese quantitative funds have since shown a rebound in performance during August.

'Financial Bonus' for Aligning with Beijing's Agenda

Nearly half of the allocations made by the two High-Flyer affiliates this year were directed towards the semiconductor industry and its supply chain, according to available data from PaiPaiWang. In addition to CXMT, these investments include advanced-packaging specialist SJ Semiconductor and companies involved in chip equipment and testing.

Industry experts suggest that while High-Flyer's pre-IPO selections have largely aligned with China's national priorities, the fund's primary objective remains potential investment upside. Ke Zong, a portfolio manager at a Shanghai-based hedge fund, commented that DeepSeek's founding team, including Liang, are fundamentally traders focused on maximizing returns.

Sigrid Wang, a tech analyst at Hutong Research, explained that High-Flyer treated Unitree as an investment asset, whereas DeepSeek invested in the humanoid robot maker as a strategic partner. She noted a clear distinction between quantitative funds seeking financial returns and DeepSeek's deliberate use of its corporate balance sheet to forge strategic alliances within the future AI ecosystem.

Kyle Chan, a fellow at the Brookings Institution, observed that as Beijing aims to channel private investment into AI, robotics, and other priority sectors, these investments have become a form of 'financial bonus for playing a role in boosting China's broader tech sector.' He added that having prominent backers like DeepSeek or Liang's quantitative funds can serve as a powerful signal, drawing attention and legitimacy to an IPO and potentially boosting its valuation.

Beijing's endorsement of DeepSeek and Liang has also facilitated access to significant listings. Wang of Hutong Research stated that policy support enhances a company's commercial prospects and mitigates some risks associated with long-term technology investments. While Liang's connections with the government have strengthened, his technology investments appear to be a convergence with Beijing's priorities rather than being state-directed, she noted.

Funding DeepSeek's AGI Ambition

DeepSeek's decision to open itself to external funding for the first time this year is seen as an indicator of the escalating capital demands in the AI sector and the increasing pressure to retain talent amidst fierce competition. Wang commented that DeepSeek has become 'too large and capital-intensive to remain simply a side project of the quant fund,' noting that DeepSeek's initial funding round of 50 billion yuan ($7.4 billion) represented over 60% of High-Flyer Quant's 80 billion yuan in assets.

The AI lab is reportedly in discussions with investors to raise an additional $7.4 billion in a second funding round, which would value the company at $74 billion, according to The Wall Street Journal. Investors in the first round included Monolith Management, Tencent, JD.com, NetEase, and battery maker Contemporary Amperex Technology.

The subsequent funding round is anticipated to conclude by the end of August. Liang briefly paused fundraising in July following the online leak of remarks from an investor meeting, which included comments about China's AI gap with the U.S. primarily stemming from limitations in computing resources.

Investors are also anticipating a future listing of DeepSeek on the mainland, according to Wayne Shiong, managing partner at Argo Venture Partners, as the startup faces the risk of senior engineers departing without adequate financial incentives. Bloomberg reported in July that Liang's stakes in DeepSeek had made him the world's wealthiest AI founder, granting him considerably more control than many U.S. founders who have diluted their ownership to secure funding for computational power.