A brief history of the quantification of private placement in China： strategy, investment, format and prospect
Inscription: Quantitative investment has been developed and practiced in China for almost ten years. Even a simple review of this industry is not an easy task. This paper briefly expounds the quantitative evolution of private placement in China from five aspects: influencing factors, strategic evolution, investment-client change, business environment and future prospect.
One: Influencing factors
Quantitative investment or hedge funds are imported in concept, so it is difficult to give a complete definition. The development of domestic quantitative industry is related to many factors, including market environment, regulatory policies, technical factors and external influences. These elements, like vitamins to maintain human growth, are intertwined and jointly affect the development and changes of the industry.
1. Market environment
The development of quantification is mainly closely related to the development of the market environment. Before the introduction of stock index futures, quantification mainly focused on long-term stock selection on the stock side, while futures mainly focused on commodity futures. On April 16th, 2010, CICC launched the Shanghai and Shenzhen 300 index futures, which opened a new era for quantitative investment. On the one hand, stock index futures provide hedging tools for stock strategies, on the other hand, they provide active trading varieties for CTA strategies, and on the third hand, they derive strategies such as spot arbitrage combined with ETF.
Subsequently, a number of new targets and tools appeared, such as treasury bonds futures, 50ETF options, IC/IH two major stock index futures, margin financing and securities lending, graded funds, convertible bonds and so on, which enriched the quantitative investment tools and strategies. Without the stock market crash in mid-2015, the launch of innovative tools should be accelerated, and the above-mentioned varieties and tools will play a greater role. Due to the impact of the stock market crash, many new varieties were "untimely" and were affected by stricter regulatory policies after their launch.
The rise and popularity of quantitative investment also has a lot to do with the stock market downturn in 2013-2014. There is no harm without comparison. Quantitative absolute return products are sought after, and the first batch of relatively large-scale quantitative private placements all rose at this stage, whether focusing on stock neutrality or CTA investment in stock index futures. In 2018-2019, quantitative products have once again become the sought-after objects of various employers, which is also related to the fact that there are not many alternative assets in the stock market downturn to some extent.
2. Regulatory policies
For quantitative investment, supervision can be divided into micro level and macro level. The micro level is mainly aimed at trading varieties and trading rules, while the macro level is more about industry policies (association policies, new asset management regulations and product structure, etc.).
In 2014-2015, the "leveraged bull" spawned by structured capital allocation ended in a stock market crash in a series of policy games, and stock index futures became a "back-pot man". The liquidity of IF stock index futures also shrinks instantly, just as a person’s heart rate suddenly freezes from 100 beats/minute to single digits, and directly becomes a vegetable. The latter tinkering policy is like giving cardiopulmonary resuscitation to a vegetative state, which brings greater disappointment after each hope. The subsequent regular discount of stock index futures is like the complications of vegetarians, sometimes good and sometimes bad.
After the supervision of stock index futures, some funds entered the commodity futures field, and then some policies were issued from time to time to guide the commodity futures field. Fortunately, the market was relatively small and everyone didn’t care too much. On May 1, 2017, the "Guidelines for the Management of Graded Fund Business" was officially implemented, excluding most retail investors, and the liquidity of graded funds, a leveraged tool, also shrank. In addition to the higher trading threshold of options, the programmatic interface of the latter trading is also stopped, and basically the wolf is fighting inside.
From the macro level, the new asset management regulations were released in 2018, which broke the rigid redemption and triple nesting, removed the priority and inferior structure, and the products should gradually move towards net worth management. Net management puts forward higher requirements for active management ability. In 2019, bank wealth management subsidiaries were established one after another, reshaping the financial management pattern, which had a far-reaching impact on the source of funds for private equity investment.
3. Technical factors
The quantitative investment industry is more like a technology-like industry, which often strives for technical strength and also considers the technical iteration cycle. Technology includes not only hardware, but also software, which is why many practitioners in the quantitative industry have computer backgrounds. The technology (or IT) factor here mainly includes two aspects: one is the improvement of the effective computing power of the quantitative company (the pain point), and the other is the access to the trading system (the itch point).
Everyone knows that technology costs money. Whether IT is buying hardware equipment or recruiting IT talents, quantitative companies are not willing to give up or have a lot of money to invest at the beginning, but have gone through a gradual process. At the beginning, there are many market opportunities, and you may be able to make money without such a great IT investment. For example, in 2013-2014, the low-frequency alpha strategy has a low transaction frequency, so you can place an order with a simple algorithm. Now that there are too many porridge, it is more and more difficult to earn money, and everyone has to fight for technology. At this stage, many investors try their best to tune high-frequency alpha companies, and they also like to ask questions such as effective computing power and servers. Efficient operation allows you to obtain (useful) information more efficiently than your opponent, thus turning it into a trading signal to obtain income. Some people may ask, if technology is so important, is IT possible for people in IT companies such as BAT to switch to quantification? Not exactly. It should be said that technical strength is one of the necessary but not sufficient conditions for quantifying private equity competition.
The above is more about quantifying the internal technical factors of the company, and most of the quantitative transactions are automated transactions, which involve docking with external trading systems. It is easier for external systems to access futures than stocks, and the supervision of futures is relatively small. After docking the exchange API, all futures companies can basically use it. The stock interface is much more complicated. Before the stock market crash in 2015, the programmatic interface of stocks was open. Private placement basically packaged several mainstream APIs and then docked different brokerage counter systems, which was more convenient. After the stock market crash and illegal allocation of funds by HOMES and other systems, the regulatory authorities stopped all programmatic interfaces. There are also alternative ways. Some quantitative private placements are traded through the securities firm’s purchasing private placement trading system (PB system), but not all quantitative private placements can be conducted in this way. Many of them are conducted through the PB system or text scanning mode within the securities firm.
The influence of the execution efficiency of the trading system on the quantitative trading results is direct and quantifiable. The competition of futures is fierce, and both market acceleration, trading system and physical distance have reached a certain ceiling. In the stock market, in addition to looking forward to the easing of policies, many brokers have also begun to exert their strength at the market acceleration end.
4. Outsiders
The outsiders here mainly refer to foreign participants. After the introduction of Shanghai and Shenzhen 300 stock index futures, many foreign companies entered China through trading companies as vests because of their active trading and good liquidity. When foreign companies first entered China, they were relatively low-key and mysterious. The domestic staff were mainly middle-and back-office personnel, and the strategy research and development were all abroad. The transaction execution could be realized through remote login deployment. The first batch of foreign-funded companies engaged in high-frequency transactions, which also let domestic practitioners know the strong technical strength and earning ability of foreign-funded teams from one side. I heard that at that time, a securities firm used a foreign trading system to save the market in order to avoid blocking orders.
The "Easton Incident", which was investigated during the stock market crash, also affected the direction of supervision to a certain extent. After the stock market crash in 2015, many regulatory and rescue measures were introduced in China, but I didn’t expect the stock market crash 2.0/3.0 to follow.
On June 30, 2016, Answers to Questions Related to the Registration and Filing of Private Equity Funds (X) was officially released, allowing qualified wholly foreign-owned and joint ventures to apply for registration as private equity fund management institutions, and to carry out private equity fund management business including securities trading in the secondary market. The Association is responsible for the registration of foreign private equity institutions. Up to now, more than 20 wholly foreign-owned private equity managers (WFOE) have registered with the Association. Among these companies, some are engaged in asset allocation, and some are engaged in absolute returns or relative returns.
Two: strategic evolution
The generation of strategy is not isolated, but closely related to the market environment. Asset categories and strategy types are different in different environments, and the risk factors implied by different strategy types are also different. This part simply tells the development path of different strategies from the perspective of asset categories.
1. Stock strategy
Stock quantification strategy is one of the mainstream strategies, which is directly related to market capacity. At the beginning, the domestic stock strategy was mainly based on absolute return strategy, and stock index futures were mainly used for hedging (short selling is rare). It just happened to meet the market of small-cap stocks, and you can make money by exposing your style a little. In 2013-2014, many stock quantitative private placements liked to operate with leverage. In December 2014, when the styles of large and small stocks were switched, many stock quantitative products were collectively retraced, and those with higher leverage also exploded, which was the first "black swan" encountered by stock quantitative products. After the mid-term stock market crash in 2015, the market liquidity declined, the stock index futures were seriously discounted, and the neutral strategy suffered a cold winter. Many stock quantitative investments were forced to transform, and some investors turned to index enhancement in order to avoid the deep discount of stock index, but the latter index "kept falling" too much, and the products made investors less money. After exploration, another group of investors began to turn to a high-frequency strategy based on volume and price in 2017, leading a wave of trends until now.
At this stage, stock strategies are mostly concentrated on high-frequency strategies such as volume and price alpha and T0, and the previous low-and medium-frequency fundamentals alpha have been difficult to do in the past two years. Stock products are mainly market neutral (absolute return) products and index enhanced (relative return) products. Market-neutral products based on stock high-frequency strategy often gain income by exposing style or factor exposure, which is not strictly neutral. Because of the high turnover of hands every day, relatively speaking, the (time) risk brought by exposure is more controllable than that of medium and low frequency. Index-enhanced products only select some indexes as benchmarks, and the selection range of trading targets may be far more than index constituent stocks. I have also seen that the basic trend of 300 and 500 enhanced products of a private equity company is the same.
Market learning has evolved rapidly. After 2019, a large number of stock high-frequency strategy products entered the market. Coupled with the liquidity and volatility of the market, the stock index continued to discount, and the stock high-frequency strategy also entered a "sideways period". The high-frequency strategic trading of stocks is crowded, which also makes some investors pay attention to the lower-frequency fundamental quantification again.
In order to cooperate with the smooth launch of science and technology innovation board and standardize Public Offering of Fund’s participation in refinancing securities lending business, on June 21st, the CSRC issued "Guidelines for Public Offering of Securities Investment Funds to Participate in Refinancing Securities Lending Business (Trial)", which provided a new way for stock strategy hedging (the scale before the securities lending business was very small). Whether the long/short double alpha era can really be started or not, and the specific effect will need time to be tested (the marketization of borrowing costs and the asymmetry of positive and negative alpha distribution are all worthy of attention).
2. Futures strategy
Before the introduction of the stock index, there was no CTA fund product in the strict sense in China, which was also related to the product distribution system. After the launch of the Shanghai and Shenzhen 300 index futures on April 16th, 2010, CTA funds gradually attracted the attention of investors, which belonged to the market cultivation stage, and individuals and institutions were involved in programmatic trading. In 2012-2013, the stock market was in a downturn, and absolute return products were sought after. During this period, CTA funds mainly traded stock index futures, and the intraday strategy was the main one, which lasted until mid-2015 and belonged to the golden development stage. After the stock market crash in June 2015, stock index futures were restricted, and many CTA funds were transferred to commodity futures, but they were faced with problems such as "acclimatization", because the volatility, liquidity, minimum change unit and delivery system of commodity futures market were different from those of stock index futures market, and stock index futures strategy, especially intraday strategy, could not be simply "transplanted". Subject to factors such as the supervision of stock index futures and the weakening of commodity market volatility, from mid-2015 to 2017, the development of CTA funds entered a period of downturn, which was a difficult transition stage. In 2018, with the deepening understanding of the commodity market, the optimization and adjustment of the strategy, and the further loosening of stock index futures driven by Apple, "peerless double focus" and crude oil, the CTA strategy performed well in 2018. From 2015 to 2018, the investment that can survive is all magical, and there are many places that are remarkable.
CTA strategy can be divided into trend tracking, statistical arbitrage and market-making strategy, etc. Now, the learning ability of investment and investment is relatively fast. From the perspective of net worth management and investor expectation management, many of them are mainly compound strategies.
In the field of futures, a force that cannot be ignored is the high-frequency team, which includes both domestic and foreign teams. This force earned the first pot of gold before the stock index futures were restricted, and more funds were transferred to the commodity futures field after the stock index futures were restricted. Because the commodity futures market is a stock game market, the capacity and income can not be compared with the past. After a period of exploration, some teams began to move to the T0 stock market.
3. Option strategy
On February 9th, 2015, Shanghai Stock Exchange launched 50ETF options, and several commodity exchanges also launched some commodity options, but the trading volume and influence were not as big as 50ETF options. The introduction of 50ETF options can be regarded as a tool to manage nonlinear risks for the market. However, due to strict account opening conditions and limited programmatic interface, the overall quantitative scale is not large.
With the improvement of liquidity, many investment strategies have been derived around 50ETF options. After communicating with market peers, it is found that the options trading strategies at this stage mainly focus on risk-free arbitrage (parity formula), volatility surface arbitrage, directional trading of actual volatility and implied volatility, event-driven strategy, etc. (The strategy classification varies from person to person, and some people analyze it from the perspectives of trading γ, gamma scaling, trading Vega, trading θ, (statistical) arbitrage, etc.).
4. Other strategies
In addition to the above-mentioned strategies classified according to asset categories, in the past quantitative development process, many staged quantitative strategies have been derived, such as spot arbitrage, ETF discount premium arbitrage since 2010, tiered fund arbitrage that was popular in 2015, and convertible bond arbitrage that was popular in 2018.
Quantitative strategy is sometimes combined with some institutional arbitrage or event-driven, such as quantitative and private placement in 2014-15 and quantitative and innovative in 2016.
Three: change of investment and care
A single quantitative investment can come smoothly from beginning to end, and it has gone through many stages. The different development stages of quantitative investment are not only influenced by the market environment and strategic cycle, but also by the factors of company management.
1, the development process
Before the implementation of the private placement registration and filing system on February 7, 2014, private placement products had to rely on channels, including trusts, publicly funded subsidiaries or securities firms. After the implementation of the private placement registration and filing system, private placement managers can independently discover products, which is a major innovation for the development of the private placement industry.
Borrowing channels to send products, the risk control and compliance systems are relatively strict, and the docking of trading systems is not very powerful. The implementation of registration and the simplification of product establishment process have spawned a large number of new quantitative private placements, some of whom came back from overseas and others came from institutions within the system.
Quantitative private equity firms have a large flow of talents, especially a batch of private equity firms established in the early days, from which many new companies have been split.
2. Business model
Companies need cash flow and make money, especially in the quantitative industry at the top of the talent tower. Without continuous cash flow, talents are easily lost. Through that mode to obtain cash flow or profit, different quantitative companies have different business and path arrangements.
From a strategic point of view, some companies focus on a certain segment at the beginning, and some companies do all kinds of strategies. Understood, more paths are to expand from a certain subdivision to other fields, such as CTA to stocks, from stocks to bonds, etc., and move towards a comprehensive strategy. On the one hand, this model can improve the original strategy with limited space or capacity reaching the ceiling, and on the other hand, it follows the principle of moving forward in the direction of least resistance.
From the management point of view, some domestic companies refer to the Worldquant model, unify the database, back-testing platform and evaluation criteria, and then recruit a large number of employees who have just graduated or have less work experience to mine factors or develop strategies, while more experienced PM will decide whether to adopt and weight them. There are also some companies that refer to the Millennium model. The company is divided into different strategy groups, and then a team leader takes several soldiers. This is a platform company, and different strategy groups may do the same type of strategy or different types of strategies.
Whether it is internal factor MOM or strategic MOM, there are not many companies that can achieve a relatively standardized model. Any model requires a large amount of resources, and it can only be done if the company develops to a certain scale or the shareholders are strong.
3. Company genes
Every company has its own path dependence and its own capability boundary. Quantifying the company’s genes is related to the academic qualifications, majors and working experience of the company’s core figures. According to statistics, the graduation schools of the core figures are very concentrated, basically from the top few prestigious schools. Professionally speaking, computer, physics and mathematics are among the top. The quantification industry has gathered a group of the smartest people, and the school logo is very obvious.
Quantifying industry experience is also very important. Many domestic quantitative tycoons have worked in Goldman Sachs, Millennium, BGI/ BlackRock, Citadel and Worldquant before, bringing back many foreign ideas and methods. There are also many quantitative bosses in China, who have grown up in the domestic market and are very familiar with domestic systems and trading rules.
4. Geographical distribution
Due to the restriction of industrial and commercial registration, the registered address of private placement may be scattered, but the office space is mainly concentrated in Beijing, Shanghai, Hangzhou, Shenzhen and Guangzhou. Statistically, the relatively large private placements are mainly in Beijing, Shanghai and Hangzhou, which are related to the rich educational resources in several places besides the relatively smooth information in the deep financial centers. Quantification industry needs a large number of interns for data processing or strategy research and development, and the background of science and engineering is preferred. There are many quantitative private placements near Zhongguancun (000931) in Beijing. It is convenient to recruit interns or employees, and many interns have become the main force of the company.
There is still a shortage of educational resources in Shenzhen, and it is difficult to find interns in quantitative companies, which is also a shortcoming that restricts the development of quantitative private placement in Shenzhen. There are also quantitative private placements in Guangzhou, and the scale is relatively small, basically near the international financial center.
5. Industry concentration
The quantitative private placement industry is an industry with economies of scale, and it is easy to form a winner-take-all situation.
Before the stock market crash in 2015, except for a few futures high-frequency companies with relatively large hardware investment, many private equity hardware investments were not high. In addition, at that time, it was possible to make a structured fund-raising scale, so the industry concentration was not so obvious.
With the rise of stock high-frequency alpha, hardware investment and labor cost investment are a very large fixed expenditure, and the entry threshold is getting higher and higher. On the other hand, with the de-channelization and net worth management, good assets become "hot cakes", and funds are more concentrated at the head, which is easy to form the "Matthew effect". Judging from the current trend of quantitative private placement of stocks, the gap between the first echelon and the second echelon and other companies is widening.
Compared with stocks, the quantitative investment concentration of low-frequency futures is not so high, on the one hand, it is related to the market size, on the other hand, it is also related to the lack of standardized process of futures strategy, and most of the time it depends on the weather. However, due to the high threshold (IT, strategy), the high concentration of futures is very high, and there are only a handful of good teams.
Iv. Business environment
Around the development of quantitative private placement industry, a unique ecosystem has been formed. This ecosystem is a complete industrial chain, including different market participants, the docking of funds and assets, and the interaction of information flow.
1. Market participants
Around the quantitative private placement, in addition to the exchanges and system providers we know, the main participants are brokers, futures companies, customers (banks, third parties, FOF, direct sales, etc.) and information providers.
As a stock broker, the support for quantitative private placement is mainly trading and financial support. For stock strategy, a friendly trading system can not only reduce the transaction cost, but also save a lot of communication time. Some domestic brokers made great efforts in the docking and service of trading systems, taking this as a breakthrough, and gathered a group of excellent quantitative investment in the early days. In addition to systematic or purchasing quantitative private placement PB system, it is more important for brokers to understand this business and respond to the service. More than once, I heard friends from the brokerage business department and the compliance risk control department complain about the conflict of ideas about system access. In addition, brokers also need a technical service team that can quickly respond to the demand of private placement, and can answer and solve the problems in the docking and subsequent transactions of quantitative private placement in time. This experience is very critical for quantitative private placement.
Another piece of support for brokers is to help private placements to connect funds. Whether it is recommended to banks or other employers, or consignment in the system, it can improve the stickiness with private placements and land the business to brokers. Some brokers have also made more efforts in this area, setting up private equity centers or wealth centers, and introducing a number of high-quality quantitative private equity consignment sales, so that high-net-worth customers can also make money, which improves the probability of multiple marketing of private equity and the stickiness of customers.
At present, many brokers also hold many competitions or launch seed funds, which may not be effective in the short term due to the long cycle, limited proportion of foreign investment and multi-objective assessment constraints.
Futures companies are brokers, similar to brokers. Compared with brokers, there is not much advantage in the docking of funds. The docking system of futures companies is not as complicated as that of brokers in terms of procedures and processes, but more in terms of speed, computer room, servers and other aspects of support for private placement. This piece of competition is also fierce, especially in the high-frequency field.
The above is mainly about brokers, and the other side is the source of funds. The sources of funds are not only brokers and futures companies, but also bank asset management (subsidiary) outsourcing, private bank consignment, third-party consignment, direct sales customers, and FOF funds.
There are also some data service providers around private placement, including the service providers of private placement data itself, which will not be discussed in detail here. We expect that there will be a relatively complete and better quality quantitative private placement database in the market in the future.
2. Fund side VS asset side
Throughout the past years, the capital side has been at the upstream of this industrial chain. After all, quantifying private placement generally requires management scale. For a quantitative private placement, it is very important to establish corresponding channels according to product characteristics. With the spread of the Internet age, the situation of "the wine smells like the deep alley" has greatly improved, and the information asymmetry is declining. However, effective channel maintenance and investor expectation management are crucial for the long-term development of private placement.
Being in the whole asset management industry, it is difficult to match the term between the capital side and the asset side. Different sources of funds have different characteristics in terms of attributes, duration, risk and return, and the domestic capital assessment cycle is generally short, so it is as difficult to find a balance between them as walking a balance beam.
The preference of the capital side for quantitative private placement is often when the secondary market is relatively depressed. When the cost of capital in the market is relatively cheap and there are not many alternative assets, quantitative products are more popular. Generally, when quantification sells well, there will be asset shortage, and good quantitative products become very scarce. The capital side will chase the quantitative products with good performance, and the head effect is very obvious, which can also be clearly felt from the recent trend.
In the balance between scale and capacity, head private placement has strong pricing power. By designing relatively harsh investment thresholds or business terms, investors who meet the requirements are screened. When the head private placement forms a brand premium, you can basically use your own channels to be direct customers.
3. Industry promotion
For investors, quantitative investment or hedge funds are relatively new concepts. Domestic propaganda about quantitative investment or hedge funds, often for marketing purposes, inevitably exists excessive publicity stunt. Either you have to quantify Simmons, or you have to make a steady profit or have a quick shortcut.
Quantitative investment, as an investment method, is not all-encompassing. It can make absolute returns, relative returns and asset allocation. Pursuing absolute income does not necessarily make money. Different types of strategies adapt to different market environments, and all strategies have adaptive periodicity. In many publicity materials, we can’t talk about benefits without considering scale and risk.
With the increase of quantitative investment and products, there are more and more awards about the quantification of private placement. The rating organizers mainly come from third parties, brokers, futures, media and so on. Some awards are consistent and have great influence on the market, while others may be closed after a year or two according to the leadership’s intention. Because there are too many award-winning units and various award criteria, investors need to check the gold content of the award-winning items.
The fund industry association has introduced many measures in private placement publicity, and investors can’t publicize their achievements at will, which has promoted the long-term development of the industry.
Wu: Future prospect.
Some time ago, many articles discussed the quantification of 2.5, 3.0 and 4.0. Aside from these figures, quantitative investment should now be in a good position. The development of the industry, most of the time depends on the weather (market opportunities, tuyere), geographical location (schools, information exchange), people and (talents, team, management).
1. Stones from Other Mountains
Looking at the ranking of some foreign hedge fund companies, it is more from the scale, and many foreign hedge funds do allocation or relative income, and some do business similar to domestic Public Offering of Fund. On the whole, foreign markets are more efficient than domestic markets, and it is more difficult to obtain excess alpha than domestic markets, especially if the scale factor is taken into account. Large-scale hedge fund companies now adopt multiple strategies.
There are also some companies that take the profit route. They mostly manage their own funds or the funds are not open for subscription. Many high-frequency companies mostly manage their own funds.
No matter the scale or the income route, the head effect of foreign companies is very obvious. In addition, foreign hedge fund companies generally have flagship products, with long historical traceability.
2. Self-operated VS asset management
From the experience of foreign countries, many hedge funds that aim at absolute returns finally manage a lot of self-operated funds, which is related to the capacity of specific quantitative strategies. After reading a lot of publicity materials, it is found that people are used to comparing Buffett’s rate of return with Simmons’ rate of return, which may not be of great reference significance, because the scale of the two is not in the same comparison dimension. China will also face this problem, and investors prefer to leave good strategies to self-operated funds, especially those with limited capacity. If there is a relatively stable strategy, investors are eager to leverage themselves and gain greater operating leverage effect.
Asset management products are more about the pursuit of scale. To meet the needs of scale, if the withdrawal control is strict, it can only reduce the income; If the income should be flexible, more products will be made with relative income.
Looking at the stock market in the long run, investors are more willing to manage their own funds or leverage themselves, and more are index-enhanced products. For the futures market, high-frequency or arbitrage strategies are more reserved for themselves, and increasing the scale depends more on medium and long-term CTA strategies.
3. Competition pattern
It will become more and more obvious that the quantitative competition pattern will move towards the ninth, and the long tail distribution will make the head brand premium ability stronger and stronger. The head effect in the field of stock quantification is obviously higher than that in the field of futures, which is related to market capacity and technical path. At present, the domestic pattern has not reached an oligopoly stage, and there are still many variables in the process of moving towards this stage.
Will the entry of foreign private placement managers (WFOE) into China have an impact on the domestic quantitative pattern? Take the stock high-frequency strategy as an example. If we rely solely on effective computing power and data mining, the reserves of many foreign private placements in this area should not be bad. It is worth observing whether there is the possibility of the latter catching up. In the field of high-frequency futures, because the stock index futures have not been loosened for a long time, the competition is now in a very fierce stage (Jump, Tower, Optiver, etc. have already started business in China). Will the new entrants reshape the pattern?
It turns out that many teams doing high-frequency futures have turned to the field of stock T0, but pure stock T0 relies heavily on liquidity and volatility, and it is worth looking forward to whether it can continue its glory. As the scale of high-frequency private placement of stocks has exceeded 10 billion, the crowded trading will make them reduce the trading frequency or join the fundamental alpha. Does it have an impact on the original fundamental alpha investment? Technically speaking, it is relatively easy for futures to turn into stocks at high frequency, and stocks to cut into fundamental alpha at high frequency. The technology is a blow to dimensionality reduction, and it remains to be seen whether there can be a breakthrough in strategic thinking and logic.
4. Risk management
Hedge Fund, in English, should be a hedge fund. One of the characteristics of quantitative investment is that it is more advantageous to manage investment risks. If risk management is not done well, there may be an oolong finger or a black swan event.
The source of quantitative strategy income is nothing more than the short-term market failure and then arbitrage opportunities or the corresponding risk premium. Risk arbitrage opportunities are always rare, and more often they are exposed to corresponding risks. No strategy can adapt to all market environments, and the strategy itself will have cyclical characteristics, and the potential risk of relying too much on exposure to gain income is also great. After all, the strategy of "trampling" or collective retreat is nothing new at home and abroad.
In addition to strategic risks, there are operational risks or compliance risks, and it is not difficult to achieve the integration of knowledge and practice in quantitative investment. In addition, the consistency of product performance is difficult to evaluate quantitatively because of the asymmetry of information. Therefore, not only private managers should pay attention to risk management, but also investors need risk management to avoid the best cause becoming the worst result.
From the perspective of the whole industry, any party’s risk management can reduce regulatory intervention, which is also good for the development of the industry. We can’t forget that in the past financial development of China, "barefoot people are not afraid of wearing shoes" often appeared, and finally the whole industry was held responsible.
Source: FICC and asset allocation
This article first appeared on WeChat WeChat official account: FICC and Asset Allocation. The content of the article belongs to the author’s personal opinion and does not represent Hexun.com’s position. Investors should operate accordingly, at their own risk.