Are hedge funds risky?

Hedge fund is an early form of fund management, which is based on the conservative investment strategy of hedging and preserving value, mainly through hedging to avoid risks and protect assets. With the passage of time, hedge funds have become a new investment model, pursuing high returns and taking high risks through short selling and other operational means. Recently, the stock market is still unclear, and investors' attention has gradually turned to various types of hedge funds.

We can often see the slogan of stability and yield promoted by hedge funds. So, what are the risks of hedge funds? What are the risks?

First of all, the style risk of large and small discs

The Shanghai and Shenzhen 300 represents large-cap stocks in A-shares. If the market-neutral strategy is adopted to hedge the Shanghai and Shenzhen 300 stock index futures, it is very likely that the stock portfolio will be smaller than the Shanghai and Shenzhen 300. Different styles of large and small plates also hide certain risks.

Second, scale risk.

With the enthusiasm of investors, the issuance speed and financing scale of hedge funds have changed significantly, and the management scale of some private equity funds has doubled in the past six months. Unlike traditional gold, when it is large, it will be limited by the amount of funds that the strategy itself can accommodate. Specifically, the amount of funds that can be accommodated is closely related to the trading frequency of the strategy, the daily turnover of the target and the fund scale of similar strategies in the market.

When the scale of funds grows rapidly and exceeds the upper limit of funds allowed by the strategy, fund companies often need to add new strategies to absorb excess funds. When there is no new strategy, it will increase the impact cost of the original strategy, resulting in a decline in the rate of return on the strategy. To put it simply, for example, when the stock holdings in the portfolio exceed a certain percentage limit, it will have a certain impact on the market price during the withdrawal process, so that the stock price will fall while selling, thus reducing the income. Generally speaking, the capacity of statistical arbitrage strategy is smaller than that of traditional multi-factor strategy, and the capacity of intraday trend strategy of stock index futures is even smaller.

Third, policy risks.

For China financial market, stock index futures is still a newborn. Compared with the securities market with a history of more than 20 years, the oldest stock index futures only have a history of more than 5 years. For such financial derivatives with natural leverage, supervision will be stricter.

The fourth is the basis risk.

For domestic hedge funds, there are not many ways to hedge. Most hedge funds hedge through stock index futures, and the basis factor is very important. When the basis is positive, arbitrage can be achieved by selling stock index futures and buying spot or ETF at the same time. Therefore, when the basis has a large positive value, it often disappears quickly and returns to normal. However, due to the high cost of stock securities lending, when there is a negative basis, it is often impossible to buy stock indexes and sell spot for reverse arbitrage, which may lead to a long period of negative basis.