1. What is DMA?
DMA, the full name of direct market access, directly translates to "direct market access". It is a trading mechanism that allows managers to connect directly to the exchange through their own trading terminals and conduct operations such as ordering, trading and settlement with the exchange.
The DMA trading model is directly connected to the exchange, so it is able to provide participants with higher trading efficiency and lower costs.
Because of the aforementioned advantages, many (especially quants**) who want to earn stable returns through market-neutral strategies see new opportunities. In the past, it was often used as a tool for quantitative private equity to increase leverage with its own funds, and it was difficult for external investors to get involved. Now, with more and more quantitative private placements of DMA asset management products (i.e., accepting external investment), DMA has also begun to enter the field of vision of mass investors.
2. DMA architecture
DMA is essentially oneTrading Mode, which is not a quantitative strategy. It's just that the quantitative ** of the neutral strategy in the current market prefers to adopt this trading model, and then launches the long and short income swap DMA product, and the DMA that everyone talks about generally refers to this product. For ease of expression, the strategy is still abbreviated as "DMA".
According to CITIC**'s research, in the DMA business model, private equity managers manage only one product account. First of all, the private equity manager uses the product account it manages to sign a yield swap agreement with a broker with income swap qualifications, and the agreement stipulates that the manager needs to pay a fixed interest rate in exchange for the linked ** and the underlying floating equity income. Under the DMA model, the private manager cannot trade directly through the brokerage desk, but indirectly through the long and short sub-accounts that the dealer has set up for the manager in its proprietary account. The specific operation is as follows: the private equity manager pays a minimum of 25% of the margin, uses the client to place trading orders, entrusts the business system of income swap over-the-counter, and arrives at the dealer's proprietary counter system after passing the system verification, and finally gives the exchange by the proprietary platform.
We analyze the basic principles of DMA architecture from the perspective of the flow of investment funds.
1. The investor submits 1 million yuan of DMA products to the private equity institution, and the 1 million yuan fund enters the product account from the investor's account.
2. The 1 million yuan of the private equity institution is transferred to the account of the brokerage trading desk as a margin, and 1 million yuan is transferred from the product account of the private equity institution to the account of the brokerage trading desk.
3. After receiving the funds, the brokerage trading desk will give the product a certificate of income swap and a first-class trading account to the private equity institution. According to the margin ratio of 25%, the funds in the ** trading account are 4 million yuan.
4. The private equity institution opens a long position of 4 million yuan in the trading account, and at the same time sends an instruction to the brokerage trading desk to open a short position in the stock index with a value of 4 million yuan, so as to build a neutral strategy position.
Suppose that the strategy makes a profit of 1% after deducting various expenses today, that is, the book profit of the account is 40,000 yuan. The brokerage trading desk will increase the valuation of the income swap certificates in the product by 40,000 to 1.04 million after **. At the same time, the custodian will give the latest valuation showing that the DMA product has risen by 4%.
3. DMA revenue analysis
DMA is a leveraged tool, and it does not change the underlying strategy logic of the product. When investors are extremely optimistic about a company or a sector, in order to improve the efficiency of capital use, they can choose to invest in DMA products corresponding to this strategy. For example, at present, DMA products mostly invest in micro-cap stocks, and short IC or IM to hedge market risk in order to obtain the return of micro-cap stocks.
1. Risks of DMA.
1) Leverage risk.
Taking a DMA product with 4x leverage as an example, when the underlying strategy drawdown is 1%, the DMA drawdown is 4%. Under high-leverage trading, if you are not careful, 4 times the happiness will turn into 4 times the tears.
2) Financing costs.
The cost of financing DMA is also something that has to be considered. Assuming that the financing cost is 4% annualized, the financing cost is 12% per annum in the case of 3 times the financing. This means that the net value of the product will be reduced by 12% per annum due to financing costs.
3) Hedging risk.
DMA will short IC or IM for hedging, and DMA hedging risk exists in two aspects.
1) IC and IM have been in a state of discount for a long time, which itself leads to a certain hedging cost of the product. If the discount converges rapidly in the short term, the hedging cost at the end will also increase rapidly.
2) Because the long and short ends of many DMAs are not completely corresponding, such as the micro cap stocks of ** do not have a completely corresponding effect with IC or IM. As a result, there may be micro-cap stocks**, while IC and IM** may lead to losses at both ends of the product. In fact, this situation did occur in this wave of rapid rise before the Spring Festival.
2. Calculation of DMA income.
The formula for calculating DMA returns is: DMA returns = (excess returns - financing costs - hedging costs) x leverage multiples.
Financing costs. Taking a DMA product of 1 million yuan as an example, financing 3 million yuan to establish a total of 4 million yuan of ** position, the cost of capital is recorded at an annualized rate of 4%, and the cost of capital = 300W * 4% = 12W. In addition, the ** end needs to establish a short position of 4 million value, the minimum margin ratio of the stock index ** is 12%, and the cost of capital = 400w * 12% * 4% = 192w。Therefore, the total annual financing cost is 12w+192w=13.92w。Financing cost = 1392/400=3.48%。
Hedging costs. IC and IM are basically in a state of discount, and the recent discount has fluctuated greatly, which is recorded as an annualized discount rate of 6%, that is, hedging cost = 6%.
Let's assume that the annualized excess return of the strategy is 20%, and the return of DMA products = (20%-3.).48%-6%）*4=42.08%。
Of course, the above calculation formula is an ideal situation, and there will be a certain amount of wear and tear in actual operation. For example, it is impossible to fully fill up, the transaction slippage is large, and the large amount of redemption is required. Therefore, the actual income may need to be discounted by 8 to 9 on this basis.
Fourth, the beginning and end of DMA liquidation
As mentioned earlier, DMA's trading strategy is to go long** and short the stock index** at the same time, and earn income in the form of a quantitative neutral strategy. And these longs are concentrated in micro-cap stocks, and we can see how high the return of the strategy is from the trend of the micro-cap stock index, and considering the recent continuous decline in IC and IM, its returns are even higher.
From the perspective of the Wande micro-cap stock index, from the lowest point of 51,813 in 2018 to the highest point of 293,760, the five-year time** is close to 4 times. Even taking into account the reasons for adjusting for the constituents at the time of the index's compilation, the returns are still very impressive.
It's impossible to make money just by relying on the fundamentals of micro-cap stocks, and it's still driven by money. This set of "make money - increase funds - continue to make money" is the same logic as the bull market of white horse stocks back then, and it is still a bull market driven by funds.
This strategy has been largely drawdown free and highly profitable over the years, attracting a lot of capital participation, thus further reinforcing the positive feedback. But A**field** will have such a long time to be comfortable and make money. Since the end of last year, the situation has begun to change.
On November 9, 2023, the supervision of DMA business began to be tightened. The requirements start on November 9 and must not exceed the end of November 8. Under this supervision, the aforementioned positive feedback was blocked, and micro-cap stocks quickly peaked.
On January 17, 2024, the CSI 500 and CSI 1000 snowballs began to enter the dense knock-in zone. On January 22, 2024, a large number of snowballs hammered in again, and the discount of IC and IM made history in the intraday.
Driven by the dual drive of scale constraints and the thickening of hedging returns, DMA further reduced its longs, and micro-cap stocks fell further below the trend.
On January 29, micro-cap stocks continued** and DMA began to stampede. The stampede continued until the beginning of February, when a lot of DMA had suffered serious losses, and many products were even hit to stop loss.
On February 5, it was then reported in the market that DMA** orders were restricted from selling.
On February 6, GJD began to intervene in the CSI 500 and CSI 1000. After IC and IM were fast**, the discount narrowed rapidly, and even the front-month contract has turned into a premium. And just as the major indices are in the red, micro-cap stocks continue to **. This means that DMA suffered a long and short double kill at this time, and DMA, which had not yet closed its position, suffered the final fatal blow.
On February 8, the restriction on selling DMA business orders has been lifted. By this time, DMA had been largely wiped out. In the case of GJD's shift to small and micro cap stocks, micro cap stocks finally ushered in a big rise on the day, but at this time, ** has nothing to do with many DMAs.
According to some statistics, in 2024, there will be many quantitative private equity products with losses of more than 90%, which can be seen in the tragedy of this round of liquidation.
Epilogue. From B** in 2015, to equity pledge in 2018, to the later snowball, two integrations, and DMA, every once glorious operation has been liquidated one after another. There is no permanent win in the a** field, only cycles.
Seeing the DMA that used to be 45° upward and is now almost lost, I can't help but think of the sentence in Kong Shangren's "Peach Blossom Fan":
I saw him raise a tall building, I watched him feast guests, and I saw his building collapse.
May each of us continue to evolve in the market!