What are the risks of hedge funds?

Whether it is stocks, funds, bonds or futures, there are risks. It is impossible to completely avoid these investment risks. What investors need to do is to recognize the risks and reduce them better. What are the risks of hedge funds?

What are the risks of hedge funds? Is the risk high? Hedge fund, an early form of fund management based on conservative lending strategy, mainly hedges to avoid risks and preserve assets. With the passage of time, hedge funds have become a new lending model, pursuing high expected annual returns and taking high risks through short selling and other operational means. Recently, the stock market is still unclear, and the attention of lenders has gradually turned to various hedge funds. We can often see hedge funds promoting the slogan of stable expected annual rate of return. So, what are the risks of hedge funds? What are the risks?

First, the style risk of large and small discs.

Before CICC launched SSE 50 and CSI 500 stock index futures this year, there was only one target for hedge funds in the stock index futures market-CSI 300 stock index futures. Shanghai and Shenzhen 300 represent 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. This difference in the style of large and small stocks will also hide certain risks. For example, the market-neutral "black swan" incident in June 20 14 was caused by the rapid rise of large-cap stocks, especially financial stocks represented by banks and non-bank finance. In the market-neutral strategy, bulls can't short, which will lead to retracement.

Second, scale risk.

With the popularity of lenders, 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. Different from 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 increases 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 decrease in the expected annual return rate of the strategy. Simply put, for example, when a stock in the portfolio exceeds 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 expected annual rate of return. Generally speaking, the ability of statistical arbitrage strategy is less than that of traditional multi-factor strategy, and the ability of intraday trend strategy of stock index futures is even smaller.

For China's 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, the supervision will be stricter. Since June 15 stock market adjustment, CICC has also adjusted the trading rules of stock index futures for many times, which has also affected the daily operation of most hedge funds. At the worst time, all kinds of futures accounts can't open empty orders. In this case, hedge funds can only close positions, low positions or even short positions. This regulatory restriction is not only reflected in the futures side, but also exists in the spot side. On July 30th, Shanghai Stock Exchange and Shenzhen Stock Exchange restricted 24 stock trading accounts, many of which were accounts of quantitative hedge funds. The same reason is that the frequency of applying for withdrawal is too high, which affects the market price trend.

The risks caused by regulatory restrictions are uncontrollable risks. In the long run, with the further maturity of the domestic financial market, we have reason to believe that such supervision will gradually fade out of people's sight and the policy risks of hedge funds will gradually weaken. But in the short term, if the stock market continues to fluctuate, the restrictions on the futures end of the stock index will continue, and the operation of hedge funds will still be affected to some extent.

Fourth, 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 critical. When the basis is positive, arbitrage can be achieved by selling stock index futures and buying spot or ETF at the same time, so when the basis is large, it often disappears quickly and returns to normal. However, due to the high cost of securities lending, when there is a negative basis, it is often impossible to buy stock indexes and sell them for reverse arbitrage, which may lead to a long period of negative basis.

When the futures end is heavily discounted, hedge funds will face the risk that the basis will converge on the delivery date when shorting stock index futures. If the expected annual return of the current month is lower than the loss caused by the basis discount, the expected annual return of the whole portfolio is negative. At present, the market is volatile, and lenders are more cautious, which is reflected in the substantial discount on stock index futures. We compared the basis differences of four contracts of CSI 500 stock index futures in the past month, and found that except for the main contract (IC 1508), the basis differences of the other four contracts were all negative, and the IC 1508 with the least discount also averaged -3.67% in that month. For most market-neutral hedge funds, such a large discount is difficult to operate. We have also observed that since July, the net value curves of public and private hedge funds in the market are relatively flat, and the overall positions of funds are relatively light.