**|Salt pickers
Author |Multifaceted Finance Working Group
Recently, rumors involving a number of leading quantitative private placements such as High-Flyer Investment, Mingtun Investment, and Jiukun Assets have been rampant about "liquidation of hundreds of billions of products, huge losses of 1.5 billion yuan in proprietary properties, 6 billion in DMA arrears, and bankruptcy of the company", which have also affected the nerves of the industry and investors.
Under the fermentation of rumors, a number of quantitative giants urgently refuted the rumors. A few days ago, a number of quantitative private equity and third-party institutions responded to ** that the rumors were not true, and that "there will be some pressure on redemption, and each one is different." The micro-disk liquidity crisis has led to the withdrawal of the net value of some products, and it is true that some products have encountered greater redemption pressure or even liquidation, but there is no situation of "liquidation of hundreds of billions of products".
But it is undeniable that the quantitative industry is indeed experiencing a historic crisis. Many quantitative private equity companies are also struggling to find life, when will the next "willow blossom" be ushered in?
A large number of quantitative index products "collapsed".
A number of quantitative private equity giants reflected on their apologies
The quantitative giant Lingjun was publicly condemned for smashing the market, and the Shanghai and Shenzhen Stock Exchanges issued a document late at night, once again releasing the signal of strong quantitative supervision ......For many quant** companies, February 2024 was a memorable month.
Since January, due to the impact of market fluctuations, the net value of some publicly offered quantitative products has been close to "halved", and the net value of many public quantitative products has fallen by 30%. In the week before the Spring Festival, the top private neutral products generally fell by more than 10%, which is equivalent to about four days to lose the expected return of investors for a year, while a large number of products suffered a sharp drawdown.
A large number of quantitative index products "collapsed", setting the largest weekly decline and excess drawdown in history, and many products under tens of billions of quantitative products fell by as much as 10-17% in a single week.
Tianfeng Quantitative Weekly.
According to the data of the private placement network, from the beginning of January this year to before the Spring Festival, the performance of a large number of top private quantitative stock selection products is in stark contrast with last year.
According to incomplete statistics, as of February 8 at the beginning of 2024, the High-Flyer 1000 Index **2330%, compared to 859%；Mingtun**Select**2970% compared to 9 percent last year01%；Wenbo quantitative stock selection**2932%, compared to 2129%；Zhuo Zhi Chenxi**2573%, compared to 1186%；Qilin Zhengxing East Embroidery**2436%, compared to 320%。
In addition, the income of public quantitative products has also been substantial, and as of February 7 this year, many quantitative products have fallen by 30% of their income.
From the perspective of annual returns, as of February 7, Dentons' dynamic quantitative A was -4742%, and the Noamdo strategy is -4432%, and CITIC Prudential Multi-Strategy A is -4008%, Debang quantitative optimization is -3633%, Jinxin quantitative selection is -3538%, Bohai Huijin quantitative growth to -3497%, Shen Wan Lingxin Smart Life Quantitative Stock Selection A is -3432%, and the national financial quantitative A is -3317%, Tianye Quantitative Core Selection A is -3249%, and the quantitative multi-factor A of the national financial system is -3219%……
Looking at the three quantitatives that fell the most before the Spring Festival this year, Dacheng dynamic volume A returned 6 last year59%, and the Noondo strategy returned 552%, CITIC Prudential Multi-Strategy A returned as high as 20 last year20%。
According to industry analysts, the current mainstream quantitative products in the asset management circle: index enhancement, quantitative CTA, quantitative neutral products and quantitative DMA products, have been affected by the crisis in different ways. In this round of crisis, the quantitative CTA was the least injured, because it tracked commodities at the bottom and had a low correlation with the market. The remaining three types of quantitative strategy products, from mild to severe, are: index enhancement, quantitative neutral, and DMA products.
Since February 19, a number of well-known quantitative private placements, including Longqi, Jiukun Investment, and High-Flyer, have written to investors to explain and even reflect on the recent net value drawdown of their products.
For example, Longqi expressed deep remorse and apologies, and said that the company will seriously summarize and reflect on the performance during this period of time, repair the excess as soon as possible, and hope that investors will give some more time. Jiukun Investment also said that although the company's strategy is under pressure in the short term, the occasional extreme will not subvert the overall strength of the team, and the company will pay close attention to market changes, technical index changes, etc., and strive to respond to new situations in a timely and appropriate manner, and communicate with investors in a timely manner.
A "bloody case" of small-cap stock crash caused by a snowball
The salt pickers learned that the source of this round of quantitative *** was a "bloody case" of small-cap stock crash caused by "snowball" products.
Snowball product is a non-guaranteed income certificate product linked to over-the-counter options designed by brokers, trusts and other institutions, which pays floating income to investors according to the changes in tracking the underlying assets, but when institutions promote snowball products, they usually package it as a high-coupon financial product, which can obtain a higher fixed coupon in most cases.
In the early stage of issuance, due to the small number of market participants, the snowball product did bring more ideal returns to investors. However, as the snowball product gets bigger and bigger, there are more and more market participants, the returns are gradually declining, and the hidden risks are also accumulating.
Since mid-December last year, there has been a rapid increase in small-cap stocks as money flows to ** stocks. The CSI 1000 Index and the CSI 500 Index fell significantly more than the CSI 300 Index, falling by more than 20% in just one month, resulting in a large number of snowball products with the CSI 500 and CSI 1000 Index as the tracking targets in the market.
Quantitative private equity firms, which used DMA strategies to make a lot of money in the past, are now in crisis.
At present, most of the DMA strategies of medium and large quantitative private placements** are market-neutral strategies, using tools such as stock indexes** for hedging while quantitatively selecting stocks, and at the same time allocating higher micro-cap stocks**. Since there is no corresponding stock index** for micro-cap stocks, you can only continue to hedge with the CSI 500 or CSI 1000 stock index**, which represents small and medium-cap stocks.
In the past few years, many private equity companies have made huge gains with this strategy, but due to the small trading volume of micro-cap stocks, so much DMA strategy funds have come in, constantly pushing up micro-cap stocks, and at the same time, the CSI 500 and CSI 1000 stock indexes have been continuously shorted and continued.
The DMA strategy exacerbated the knock-in of snowball products, which in turn caused the market to worry about small-cap stocks**, which in turn triggered the collapse of the DMA strategy.
Source: 21st Century Business Herald.
Li Zheteng, partner of Liangdao Investment, believes that this risk event has exposed a common phenomenon in the quantitative industry, that is, the importance of the first-class model is far greater than that of the risk control model. Driven by the brilliant performance of quantitative trading strategies in the past few years, quantitative institutions have generally made huge R&D investment in the best models, but at the same time, the research on risk control models is generally weak.
In addition, many managers' cognition of risk control is still stuck in data, in fact, investors should always remind themselves: the market and investors are always interacting, the market guides the investment behavior of institutions, and the behavior of institutions is constantly changing the market. Exploring the possible investment risks only in historical data may end up being taught a hard lesson by the market.
Darkness before dawn?
A number of quantitative institutions staged "PUBG".
It is worth noting that in the face of this major crisis, most quantitative institutions were able to respond quickly and staged a "PUBG" at all costs, but some companies also behaved very "Buddhist".
For example, Lingjun Investment, which is known as the "New Four Heavenly Kings" in the quantitative circle along with Jiukun, High-Flyer, and Mingtun, has made many limit adjustments in a short period of time, and finally violated laws and regulations due to improper operation.
In January this year, Ningbo Lingjun's products were still dominated by small and micro disks. However, on February 8, Ningbo Lingjun significantly adjusted its position from the CSI 2000 to the constituent stocks of the CSI 1000 and CSI 500. On the day of the repositioning, the "national team" entered the CSI 2000 ETF in a big way, and the CSI 2000 index rose 875%, Ningbo Lingjun missed this wave of surge.
Immediately after February 19, the first trading day after the Spring Festival, the market opened high, and Ningbo Lingjun quickly and significantly adjusted its position from the three major stock index constituents such as CSI 300, CSI 500 and CSI 1000 to the CSI 2000 constituent stocks in small and micro caps. On the same day, the CSI 2000 index rose 437%, Ningbo Lingjun has achieved good returns.
However, within 1 minute of the opening on February 19, Ningbo Lingjun sold about 256.7 billion yuan**, the Shanghai Composite Index and the Shenzhen Component Index fell sharply, affecting the normal trading order.
In response to its improper operation, the Shanghai and Shenzhen Stock Exchanges imposed a suspension of trading measures on Ningbo Lingjun and launched a public censure procedure, releasing a strong regulatory signal for the illegal activities of quantitative institutions that affect the smooth operation of the market and damage the legitimate rights and interests of investors.
Ningbo Lingjun also issued an announcement in the early morning of February 21 saying that it would resolutely obey the exchange's measures. At the same time, the company attaches great importance to the problems existing in the product transaction, and has carried out deep internal reflection and review.
Unlike Ningbo Lingjun's operation of "fighting against the water" at the expense of violating the law, tens of billions of quantitative derivatives chose to "lie flat". According to the 21st Century Business Herald, through past experience, Yanfu believes that at this stage, as long as the product is not passively terminated due to liquidation, touching the stop-loss line and other reasons, and does not artificially intervene in the quantitative model, the final excess will be naturally repaired in a short period of time.
In addition to the above two extreme cases, most quantitative institutions are also actively looking for a glimmer of life.
Aifang Assets said to ** that on January 22, when the CSI 500 and CSI 1000 obviously began to break and the discount of the futures index began to expand sharply, it began to gradually switch ** to reduce the exposure to small market capitalization. After a few rounds of corrections, there is no longer any exposure of market capitalization and style.
Tiansuan quantification means that before the start of the last week before the Spring Festival, Tiansuan has controlled various style factors, especially the market value factor, at 03 standard deviations and quantitative hedging strategies reduced to 50%**
High-Flyer Quant pointed out that it has tightened its overall risk control in the week before the Spring Festival to prevent the impact on the portfolio in the event of an extreme liquidity crisis in the event of a small market capitalization**, and analyzes the performance of the model on each trading day to continuously optimize. However, it expressed confidence that the market will gradually return to normal and the strategy model will return to normal.
However, since February 6, the small, medium and micro cap index has a warming trend, and the CSI 1000 index alone has risen by 20%, and the CSI 2000 index and CSI 500 index have risen respectively. 05%, quantitative private equity has also been given a respite in the rising **.
According to the Economic Observer, a 10 billion quantitative private placement said in the latest roadshow that up to now, the excess income lost by the company in the week before the Spring Festival has been repaired by more than half; On February 22 alone, the income of a top quantitative private equity ** selected strategy product has exceeded 4%, and the income of the product after the Spring Festival has exceeded 17%, and it has also achieved positive returns since February; According to quantitative private equity sources, since February 8, the company's quantitative stock selection products have reached 27% of the income.
However, the dark night has not yet completely passed, most quantitative private placements are still struggling, and quantitative trading is also in a crisis of confidence. And quantitative trading, which has long been controversial in China, is now under strong supervision.
On the evening of February 20, the Shanghai and Shenzhen Stock Exchanges both announced that the current quantitative trading reporting system has been implemented smoothly, and at the same time, the Shanghai and Shenzhen Stock Exchanges have proposed six major measures to establish and improve the regulatory arrangements for quantitative trading.
It is reported that on September 1, 2023, the Shanghai and Shenzhen North Stock Exchanges issued the "Notice on Matters Related to the Reporting of Programmatic Transactions" and the "Notice on Matters Related to Strengthening the Management of Programmatic Transactions", establishing a special reporting system and corresponding regulatory arrangements for quantitative trading, which were officially implemented on October 9.
Bai Wenxi, vice chairman of the China Enterprise Capital Alliance, pointed out that the recent statement on the quantitative trading reporting system issued by the Shanghai and Shenzhen stock exchanges is mainly to standardize the behavior of quantitative trading, reduce its impact on the market, and maintain the stability and fairness of the market, so that the regulatory authorities can better understand and control market risks.
Overall, the role of quantitative trading in the market is two-sided, requiring regulators and market participants to work together to regulate and stabilize the market.