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in the context of the recent surge in a-shares, on september 30, shengquan hengyuan, a well-known leading quantitative private equity institution, issued a letter of apology to clients. it stated that the market was extremely active last week and had a significant impact on the company's neutral products. first, last week the drawdown is estimated to be about 2%. the current large positive basis loss is temporary and is mainly caused by the poor policy performance of the shanghai stock exchange.

as early as last friday, it was reported in the private equity circle that the alpha hedging strategy of a certain quantitative private equity was liquidated. some short futures index futures orders were faced with forced liquidation, and the futures index suffered huge losses. industry insiders pointed out that the current short squeeze market has a relatively obvious impact on quantitative neutral strategies.

well-known leading quantitative private equity firm apologizes urgently due to retracement

on september 30, the a-share market continued its crazy performance. the market volume surged. the shanghai stock exchange index rose by 8.06%, the gem index soared by 15.36%, and the turnover of the shanghai and shenzhen stock exchanges reached 2.593 billion yuan. looking at the entire month of september, the shanghai stock exchange index rose 17.39% in september, the shenzhen component index rose 26.13% in september, and the gem index rose 37.62% in september. in such a short squeeze market, private equity subjective long strategies and quantitative long strategies can be said to be making a lot of money. however, such a market situation is undoubtedly the most painful for private equity investors with neutral strategies. in the bull market, they are losing money.

some media broke out that shengquan hengyuan, a well-known leading quantitative private equity institution, issued a letter of apology to clients due to the sharp retracement of its products. later, reporters found the letter of apology issued by shengquan hengyuan in the private equity circle. shengquan hengyuan believed that the market last week extremely active, it has had an impact on the company's neutral products. first, the retracement last week was estimated to be about 2%, and there are some differences among each product. all are losses caused by the convergence of futures basis and the transformation of all futures contracts into positive basis. the convergence loss of negative basis is a one-time loss that we need to bear. the current large positive basis loss is temporary, mainly due to the poor policy performance of the shanghai stock exchange. if the market pricing mechanism is repaired this week, this loss will be made up for, so the real retracement last week was around 1%.

shengquan hengyuan was established in july 2014. in 2015, it was registered as a private equity fund manager and issued its first product. in 2020, it became a tens-billion quantitative private equity manager. according to the official website, team members come from well-known universities such as tsinghua university, shanghai jiao tong university, nanjing university, renmin university of china, university of science and technology of china, university of pennsylvania, ucla, ucl, and durham university. data from the china foundation association shows that as of now, the company has registered a total of 123 products, of which 7 are newly registered products this year.

according to the reporter’s understanding, under the current short-squeeze market, some private equity institutions’ neutral strategy products have indeed experienced a certain retracement recently, and even individual company products are at risk of being liquidated by futures companies. on september 27, the a-share market surged. at that time, a breaking news came out in the private equity circle. a certain private equity alpha hedging strategy product had a liquidation. the futures index suffered a huge loss. it was too late to allocate funds or the cash position was not enough. some luck good allocations can be sold with fixed income, but some have problems with position management, and some short futures orders are facing forced liquidation.

in this regard, industry insiders told reporters that under the current short squeeze market, it will indeed have a greater impact on quantitative private equity strategy products. the first is that the market is generally rising, and the dispersion of stock returns may decrease, leading to a deterioration of the alpha environment and making it more difficult for stock quantitative strategies to obtain excess returns; secondly, the basis of stock index futures may change during the short squeeze market. if the basis moves if the price is wide, then the hedging costs on the short side will increase, further compressing the profit space of the neutral strategy. data from the private equity pai pai network shows that the net unit value of shengquan hengyuan quantitative arbitrage no. 27, a subsidiary of shengquan hengyuan, was 1.311 yuan as of september 20. it has lost 1.97% this year and has gained 31.1% since its establishment.

the sharp drop in the neutral strategy stems from the sudden premium of stock index futures

on september 27, 2024, affected by multiple positive factors, the a-share market rose sharply. huatai futures pointed out in a special report on stock index futures that on september 27, neutral hedge public funds generally fell sharply, with the largest decline being 3.2%, and the average decline reaching 2%. the main reason for the sharp plunge in neutral hedging products is that the sudden premium of stock index futures has brought about excess losses on the hedging side of stock index futures ih (2%), if (2.5%), ic (3%), and im (3%). at the same time, the stock side is unlikely to make excess returns above the above level in one day, so neutral hedging products show an average one-day decline of 2%.

huatai futures pointed out that the premium on the futures side is not entirely due to the pricing of the futures side, but also due to abnormal spot prices. in addition to the abnormal spot index prices, the premium of stock index futures is also affected by the forced liquidation of neutral hedging products. due to the congestion of trading on the shanghai stock exchange, the stock side of neutral products did not increase enough, and the real-time net value of the product experienced a sharp retracement, triggering the order for the product to adjust its position. the concentrated liquidation of the hedging side of the stock index futures further promoted the premium of the stock index futures.

bu yili, a wealth researcher at paipai.com, told reporters that the short squeeze market has indeed had a significant impact on the neutral strategy of the stock market. the so-called neutral strategy of the stock market usually obtains alpha returns by constructing a long stock portfolio and establishing corresponding short positions at the same time. the main risk of this strategy lies in the failure of the alpha strategy and the change in the basis. in the case of a sudden rise in the market, if the stock index futures increase more than the stock index spot, the negative basis will quickly narrow or even become a positive basis. at this time, the market neutral strategy you will suffer losses. even if there is excess performance on the long side, it will not be able to cover the losses caused by large changes in the basis.

zheng yanxin, fof fund manager of quanjing fund, told reporters that the current short squeeze market has a relatively obvious impact on quantitative neutral strategies. the quantitative neutral strategy uses quantitative models to select stocks and construct a basket of stock portfolios. at the same time, market risks are hedged by shorting stock index futures. in recent days, the market has an obvious upward trend, with a large increase and a fast speed. the stock index futures have increased more than the spot stocks, which means that the losses on the short side are greater than the profits on the long side. at the same time, if the stock index futures rise too much, it is easy for the short side of the neutral strategy to be liquidated due to insufficient funds. however, it takes time to replenish funds on the short side, which makes the neutral strategy likely to be naked long for a certain period of time. if the market falls during this period, it will cause a fall without hedging protection, which will have a greater impact.