The Chinese stock market has been "incredible" for Prescient Investment Management, which has taken advantage of an inefficient exchange dominated by retail investors. Liang Du, head of balanced and China funds at Prescient, said: "Our balanced fund has returned 122% since inception in March 2013, at 51% a year after fees. The returns in China have been incredible."The company now runs R2-billion in Chinese assets.As an investment manager using strict quantitative analysis, Liang said Prescient had been able to make hay in a Chinese market where 80% of investors were individuals.Unlike the highly efficient and institution-dominated JSE, the majority of retail investors on the Chinese bourse are prone to predictable emotional biases."A year ago was a once-in-a-lifetime opportunity," Liang said. "You see some silly things in China - like company name changes. Any time a company changes its name to something involving "hi-tech", "peer to peer" or "cloud", its stock rises.story_article_left1"People think it's much easier for a one-yuan [about R2] stock to rise to a two-yuan stock than a 10-yuan stock to double."It's just a belief that the smaller the denomination of the shares, the greater the rally. We look at, on aggregate, the duration of these phenomena and then we capture that alpha [where the share performs above the benchmark index]," Liang said."Chinese retail investors overreact for days in a row to tiny changes in good or bad news."In this environment, selling at the top and buying at the bottom can mean huge returns."You won't win all the time, but on aggregate it's extremely consistent. The market is massively inefficient," Liang said.While investors were learning and the regulator was doing its best to educate the public, any investor with the right research and risk analysis would find opportunities, Liang said."I make it sound easier than it is, but irrationality exists."For Prescient, which operates the Prescient China Balanced Fund and a Prescient China Conservative Fund, building exposure to the Chinese market was difficult at first.The company initially applied to the Chinese regulator for a $50-million quota: "But nobody in South Africa was willing to pull the trigger. The first $50-million was difficult to fill ... Since then, however, we've raised over $150-million for China."By itself it's volatile and risky, but combined with a South African portfolio, because it's uncorrelated to what happens here, it's a great building block."Liang said Chinese retail investors typically only have so much cash, so it tended to be an either-or situation between corporate bonds and equity, creating a mispricing opportunity..story_article_right2In opening up the private sector, the Chinese government bought up "dodgy" corporate bonds and replaced them with finance ministry bonds at a more realistic interest rate.Although corporate bonds may include the risk of a company being made an example of, and being allowed to fail, Liang said this had not happened yet. So good yields could be found as long as the credit analysis was up to scratch.Exposure to Chinese stocks will inevitably increase for South African pension fund members.The trend of including Chinese stocks and bonds is heralded by the FTSE/Russell indices recently launching the FTSE China Inclusion Indexes."As an investment destination, China will be in your portfolio long-term. There's no reason not to have it, so start thinking about it," Liang said."The economy is moving up the value chain, produces finished goods, has a balanced budget and a ... trade surplus."..