Excess Returns Podcast: The Global Regime Change | Jason Hsu on AI, Factor Investing and What Investors Miss About China

Episode Date: February 19, 2026
Hosts: Jack Forehand, Justin Carbonneau, Matt Zeigler
Guest: Jason Hsu (Co-founder of Research Affiliates, Founder & Chairman of Rayliant Global Advisors, Chief Investment Strategist at Sowell Management)

Episode Overview

This episode dives deep into the evolving global investment landscape, focusing on the seismic shifts generated by China's economic structure and innovation, the disruptive force of AI on professional services and investing, and how factor investing is transforming—especially as opportunities arise outside traditional US markets. Jason Hsu shares insights into China’s misunderstood economy, the interplay of state and market forces, the AI revolution’s impact on labor and investing, and tactical guidance on global diversification.

Key Discussion Points & Insights

1. Misconceptions About China and Its Economic Structure

• China is Not Purely a Centrally Planned Economy:

  • Many US investors mistakenly view China as a monolithic, state-controlled “Soviet Bloc” economy.
  • In reality, China runs a form of “fierce internal capitalism,” with intense competition among private enterprises and entrepreneurs.
    • Quote: “I think the biggest thing we get wrong at the highest level is we make it into a bit of a values, a judgment player...But China is much more complex than that.” — Jason Hsu (02:06)

• The Role of the Chinese Government:

  • The government acts primarily as a massive venture capitalist (VC), seeding innovation and fostering competition but not micromanaging businesses.
  • VC funds are IR-driven, seeking returns and spreading bets, akin to private market practices globally.
    • Quote: “Beijing recognizes that it has no idea how to create AI...So it depends on private enterprises and entrepreneurs.” — Jason Hsu (05:23)

• Manufacturing Dominance Stems from Competition, Not State Subsidy:

  • China’s manufacturing prowess, such as with BYD’s high-quality, low-cost EVs, is due to cutthroat market dynamics, not simply government support.
    • Quote: “They got better than Tesla quality at a third of Tesla price. That doesn’t come from just state subsidy and state intervention. That can only come from fierce, profit-driven competition.” — Jason Hsu (07:51)

2. US-China Trade & The Monopoly of Manufacturing

• Reframing the Impact of Tariffs:

  • The view that US consumers hold all the leverage is flawed; in reality, China has near-monopoly in global manufacturing—making tariffs ultimately self-damaging for the US and its allies.
    • Quote: “China has become the world's factory. In fact, it may be the world's only factory.” — Jason Hsu (09:12)

• Implications for Investors:

  • China’s dominance means its economy and companies continue to trend upward, despite external policy shocks and bearish sentiment swings.
    • Quote: “As long as you know that something isn't going to go away, then when prices fall, it becomes a good value buy...China is gradually trending up with a lot of massive whipsaw for its market.” — Jason Hsu (12:22)

3. The Real Estate Crisis and China’s Strategic Pivot

• Conscious Policy Shift Away from Non-Productive Assets:
  • China recognized the economic drag of real estate bubbles (as seen in Japan, Korea, Hong Kong) and intentionally pricked the bubble, redirecting resources toward productive sectors like manufacturing and tech.
    • Quote: “If they build an economy that's heavily dependent on real estate, what's going to create is more and more wealth, are going to concentrate into a non-productive asset...They want to avoid the Japanese real estate bubble.” — Jason Hsu (13:48)

4. AI's Coming Disruption—Parallel to Globalization

• AI as the New Outsourcing:

  • Hsu likens the impact of AI to what globalization did to manufacturing jobs—AI will disrupt professional services, replacing routine intellectual labor with cheaper, scalable machine labor.
    • Quote: “What globalization did to factories, AI is soon going to do to professional services.” — Jason Hsu (15:58)

• Economic Implications:

  • Expect labor non-participation rates in developed markets to rise further—from ~30% potentially up to 40%—as AI reduces the need for many jobs, forcing governments to take remedial fiscal measures.
    • Quote: “Labor non-participation is going to go from 30% probably to 40%...What that means is, look, the government is simply going to have to print more money and hire more of us to work at some equivalent of a DMV.” — Jason Hsu (17:50)

• What Humans Can Still Do:

  • The “protected class”: athletes, entertainers, and those whose work requires human connection or legal liability.
  • Those who ask the best questions and leverage AI intelligently will retain relevance.
    • Quote: “Athletes, entertainers, performers...we like to see humans perform and do amazing things by human standards.” — Jason Hsu (19:36)

5. The US vs. China: Not a Winner-Take-All Battle

• G2 World Brings Healthy Competition and Innovation:
  • Technological “carve-up” results in two separate spheres, allowing Chinese and US tech giants to flourish, cross-pollinate innovations, and reduce the downsides of monopoly.
    • Quote: “You kind of have two innovations that compete fiercely within their own domain...there's still enough competition and enough sort of cross-pollination which I think is healthy and good.” — Jason Hsu (21:57)

6. China’s Asset-Light Approach to AI Innovation

• Necessity Breeds Innovation:
  • Unlike the US’s capital-intensive “build everything” strategy, China’s “asset-light,” open-source AI development drives more cost-effective and widely distributed innovation.
    • Quote: “What we've seen from Deep Seek...it cost them 1/20 of money to get 80% of the way in training in AI. That's the kind of innovation that happens when you don't have enough money.” — Jason Hsu (26:44)

7. Portfolio Construction and the "End" of US Exceptionalism

• Diversification Beyond US-Centric Portfolios:

  • The “G2” (US & China) world necessitates diversifying away from US-only positions, both for valuation and market-access reasons.
  • Institutional investors and endowments already lead by taking larger EM and DM positions. China should be managed distinctly from the broader EM basket due to its scale and unique dynamics.
    • Quote: “It wouldn't hurt for investor portfolios to also diversify near that trajectory as well.” — Jason Hsu (31:26)

• China Offers Unique Alpha—Especially in Tech:

  • China tech ETF (CNQQ) provides exposure to the “Chinese QQQ,” letting US investors participate in tech profits otherwise out of reach.
    • Quote: “CNQQ...so that American investors...can capture all the growth from big Chinese tech companies.” — Jason Hsu (36:25)

8. Policy Risk in China

• Government Interference is Real—Everywhere:
  • Policy risk exists, but China has become more 'hands-off' after learning from past mistakes (e.g., the Jack Ma saga).
    • Quote: “What they have done over time is they realized whenever [they] got involved it was negative...So I think, you know, Beijing has now taken much more handoff sort of role.” — Jason Hsu (38:58)

9. The Alpha Reservoir: Factor Investing in China

• China's Retail-Driven Markets are Fertile for Factor Strategies:

  • Market inefficiencies, behavioral biases, and dominance of retail investors create unusually high alpha for factor strategies.
    • Quote: “It’s very retail...as a result of that, all the behavioral biases...are right there in plain sight.” — Jason Hsu (40:35)

• Traditional Factors Work Better in China Than in the US:

  • Academic anomalies still persist as institutional ARBs are less active.
    • Quote: “A lot of high frequency traders...are making record profits...behavioral factors work insanely well. And this is what I mean by the alpha reservoir.” — Jason Hsu (40:35)

10. The Evolution (and Death) of Factors in the US

• US Market Efficiency Erodes Classic Factor Edge:
  • Value and other factors have underperformed, largely due to better market efficiency and the rise of dominant tech-driven growth companies.
    • Quote: “If you buy growth companies in the US you are going to get earnings growth...If you buy a value company in the US you do get companies that don't grow and you're not getting a better deal.” — Jason Hsu (46:03)

11. The Future: AI and Factor Investing

• Machine Learning for Sustainable Edge:

  • The edge now comes from “man plus machine”—curated, unique data and experience with AI tools, rather than brute computational power or standard models.
    • Quote: “The man in the machine, that machine scales the man, but it's gonna be the man that's being scaled that matters.” — Jason Hsu (51:16)

• Quant Models for Emerging vs. Developed Markets:

  • Models that no longer work in the US still succeed in China, echoing the historical lag in financial market development cycles.
    • Quote: “Most quant models don't work in the U.S. anymore, but they were originally developed in the U.S. ...the historical data of the U.S. is quite relevant for understanding the future of China.” — Jason Hsu (54:15)

12. Bringing Institutional Approaches to Retail

• New Initiatives:
  • Hsu’s Rayliant is partnering with platforms (e.g., Sowell Management) to bring institutional asset allocation and strategies to retail investors.
    • Quote: “We have recently...brought our institutional products to the retail world, created ETFs...so institutional best practice can now be available at the wealth level.” — Jason Hsu (58:23)

Notable Quotes & Memorable Moments

• “China has become the world's factory. In fact, it may be the world's only factory.” — Jason Hsu (00:00, 09:12)
• “What globalization did to factories, AI is soon going to do to professional services.” — Jason Hsu (15:58)
• “Competition is just long term good, right? ...the right solution can't be only Nvidia knows how to make GPU, right? That cannot be a right solution.” — Jason Hsu (24:18)
• “A lot of high frequency traders...are making record profits...behavioral factors work insanely well. And this is what I mean by the alpha reservoir.” — Jason Hsu (40:35)
• “The historical data of the US is quite relevant for understanding the future of China.” — Jason Hsu (54:15)
• “The machine scales the man, but it's gonna be the man that's being scaled that matters.” — Jason Hsu (51:16)
• “I think Ironman is the best analogy. Right. Like Tony Stark with Jarvis… Jarvis can't do useful and interesting things without Tony Stark.” — Jason Hsu (52:36)
• “It's very easy for a rational investor to get crushed by the irrational retail army.” — Jason Hsu (61:27)
• “As an economist, as an investor, I want to understand, I want to forecast… that’s super exciting.” — Jason Hsu (60:09)

Timestamps for Key Segments

• China’s Economic Structure & Misconceptions — 02:06 to 07:51
• Tariffs & Manufacturing Monopoly — 09:12 to 12:22
• China’s Real Estate Crisis & Policy Pivot — 13:48 to 15:42
• AI and Labor Disruption — 15:58 to 19:36
• What Remains for Humans Post-AI? — 19:36 to 21:22
• China-US Tech Rivalry: G2 World — 21:57 to 24:18
• China’s Asset-Light AI Strategy — 26:44 to 29:02
• Portfolio Diversification in the G2 World — 29:16 to 33:24
• China Tech (CNQQ ETF) & Policy Risk — 36:25 to 40:17
• Alpha Reservoir & Factor Investing in China — 40:17 to 46:03
• The Death/Evolution of US Factors — 46:03 to 49:10
• Future of Quant Investing & AI — 49:10 to 54:15
• Institutional Practices for Retail Investors — 58:23 to 59:38
• Hsu’s Excitement for the Future — 60:09 to 62:16

Conclusion

This episode of Excess Returns with Jason Hsu offers a rich, nuanced analysis of the global investment paradigm. Hsu challenges common Western assumptions about China, explains the game-changing role of AI for labor and investing, and argues for nuanced, globally diversified portfolios—especially now that the G2 world is becoming reality. His perspectives on factor investing, the evolution of market inefficiencies, and how technology is reshaping both investment practice and the global economy are essential listening for serious investors seeking to understand the tectonic shifts underway.