Behind the penalty of Lingjun Investment: an unprecedented retreat of quantitative products, and the ...... of private placement to convert stocks

Reporter: Li Na, Wang Haimin, Yang Jian    

After a series of storms in the market a few days ago, quantitative private placement became the last domino to fall in this round of storms.

Since the beginning of 2024, the net value of a large number of quantitative products has experienced a round of cliff-like decline, and quantitative private equity has collectively staged an excess drawdown, and the drawdown is the extreme value in five or even ten years.

In the process, a quantitative institution called Lingjun Investment became the target of public criticism, because it sold a large number of Shanghai and Shenzhen stocks in a short period of time after the market opened on February 19, triggering a sharp dive in A-shares, and was punished by the exchange with trading restrictions and public reprimands.

In August last year, when the A-share market opened sharply higher and then fell rapidly, triggering an unprecedented wave of public opinion about quantitative private equity smashing and shorting, Cai Meijie, chairman of Lingjun Investment, reposted an article defending quantification, with the text: "China's quantification has endured too much unwarranted malice, and it is pure ignorance to say that quantitative smashing is either stupid or bad." The Chinese quantitative fund, which is always full, is the backbone of the big A. ”

In retrospect, these statements seem ironic. And the incident of Lingjun Investment has also finally brought to light the controversy that has lasted for many years about whether quantification will smash the market.

Quantitative private placements claim to beat the market with machine intelligence and mathematical models to earn excess returns. In the past year or two, they have fully enjoyed the excess return dividend brought by the exposure of the market value of small and micro caps. But around the Spring Festival this year, they suffered this unprecedented retreat, so that their "machine black box" was torn off the fig leaf.

Some industry insiders described this round of quantitative sharp drawdown as an "unprecedented tragedy in the quantitative circle", and it has been forwarded by a large number of institutions.

This is just one of the many dilemmas faced by quantitative private equity in 2024. In addition to the extreme market of black swans and customer redemption pressure, there are also rumors, apologies, and the landing of regulatory policies. Some investment institutions believe that it is all caused by "style drift".

How did this happen? Why did their quantitative strategy fail? What does "style drift" mean, and what consequences and reflections will they face? This article will uncover the truth behind this "quantitative tragedy".

Lingjun changed the strategy to adjust the position

In a short period of time, A-shares plunged

Recently, the market has suffered a chain reaction, like the first dominoes being toppled and then falling one by one, and quantitative private equity is the last domino to fall in this storm.

▲Screenshot source: Tianfeng Securities Quantitative Weekly Report (2024.02.05-2024.02.08丨2024 Issue 6)

Judging from the net value performance of the neutral strategy of mainstream quantitative private equity institutions in the past year disclosed in the quantitative weekly report of Tianfeng Securities, the net value of a large number of quantitative products has experienced a round of cliff-like decline in the week from February 5 to February 8 this year, and the form is "spectacular".

Let's review the process of this "chain reaction":

Perhaps in order to recover the net value of losses, some quantitative private placements immediately made big moves on the first trading day after the Spring Festival this year, and a large number of concentrated selling orders in a short period of time also affected the market as a whole.

On February 20, the Shanghai Stock Exchange and the Shenzhen Stock Exchange respectively announced that in the transaction monitoring, it was found that Ningbo Lingjun sold a large number of Shanghai stocks and Shenzhen stocks totaling 2.567 billion yuan in a short period of time after the opening of the market on February 19, resulting in a sharp dive in A-shares, and Ningbo Lingjun was given a penalty of restricting trading for 3 days and publicly condemning.

Subsequently, Lingjun Company issued an announcement that on February 19, 2024, all the company's management products as a whole bought a net of 187 million yuan, but the trading volume was large within one minute of the opening of the day.

▲Recently, the net value and excess return of Lingjun Investment CSI 500 Index products have had obvious drawdowns Screenshot source: Tianfeng Securities Quantitative Weekly Report (2024.02.05-2024.02.08丨2024 Issue 6)

A senior quantitative private equity person in Shanghai told every reporter: "Lingjun sells fast not because of high-frequency trading, and it has no high-frequency trading." They have a long strategy cycle, and this time it should be because of the change of strategy. Lingjun was not shorted in the first place, it was bought at the same time when it was sold at the opening, but because it sold the constituent stocks, it affected the index. ”

Judging from the changes in the holdings of the weekly 500 index increase model recently announced by Lingjun Investment, the proportion of CSI 500 index constituent stocks has undergone drastic changes since the beginning of this year, with the proportion of CSI 500 constituent stocks being 18% on January 5, increasing to 30% on January 12, and maintaining this ratio until February 2. On February 8, the last trading day before the holiday, the proportion of CSI 500 constituent stocks quickly increased to 80%, and on the first trading day after the holiday, it quickly dropped to 60%. This also means that in just one day, the proportion of CSI 500 in the Lingyi 500 index increase model has decreased by 20 percentage points.

The above-mentioned Shanghai quantitative private equity person further pointed out that I think there are two aspects of Lingjun's incident that need everyone's attention:

First of all, large quantitative private equity funds cannot cut their positions back and forth like small institutions, and it is impossible for large institutions to run away, so don't run back and forth. As far as we know, there are many small private placements that also took the same action that day, because it is small, and the impact is not big.

Secondly, Lingjun did not control the speed and scale of the transaction, which had too much impact on the market.

Obviously, Lingjun also recognized this, and said in the subsequent announcement that it would deeply learn lessons, more carefully study relevant laws and regulations and trading rules, effectively enhance compliance awareness, and strictly control the transaction progress, transaction constraints, and control the transaction rhythm by improving the trading model, so as to ensure smooth and balanced transactions in the whole process of trading, effectively maintain the normal market trading order, and fully protect the legitimate rights and interests of investors.

Stampede converts stocks

Quantitative excess accelerates losses

Since 2024, compared with previous rumors, quantitative private equity has encountered multiple events such as extreme black swan market, customer redemption pressure, rumors, penalties, apologies, and regulatory policies.

In the product books released by many quantitative private equity institutions, they cannot avoid the unprecedented extreme market.

As stated in the product book, since January 18, a large number of funds have begun to buy the CSI 300 ETF, making the CSI 300 stable above 3,200 points, while the 500 and 1000 indices have accelerated their decline due to the selling impact of the snowball. At this time, the market is already in a panic mood. Based on the observed behavior, market participants formed a consensus that the 300 index is safe, and sold a large number of small tickets to buy 300 constituent stocks. This consensus gradually developed from 22 to 26 January and quickly strengthened from 29 January to 2 February. The following data is used as a reference:

From the above information, it can be seen that quantitative products have been facing the adverse impact of capital since mid-January, and it is gradually accelerating. The quantitative strategy itself has the effect of absorbing capital volatility and stabilizing the market cross-section, so the excess impact in the first two weeks (January 15-26) is limited. However, when the market style has been going to the extreme of the unilateral market, the quantitative absorption capacity is exhausted, and then the liquidity of the market quickly disappears, and the quantitative excess also begins to accelerate losses.

From February 5, 2024 to February 8, 2024, from Monday to Wednesday of the week, a large number of funds began to continue to buy CSI 500 ETF and CSI 1000 ETF, which triggered a variety of situations such as the lack of liquidity and capital stampede of CSI 2000 and subsequent stocks, and the long-short power began to be unbalanced. During this period, a large amount of money stampeded into 500 and 1000 constituents in order to avoid risk, and the chain process intensified. In the process, the strategy optimizer has been increasing the proportion of 500 and 1000 constituent stocks.

I foresaw the signs, but I didn't expect the risk to be so big, which is probably the most real feeling of some private equity funds looking back on the past.

Is it worth reflecting on the practice of blindly pursuing excess, without accepting alpha decay?

A private equity fund wrote in a letter to investors: "The real value of this period of time is to cool down the hot quantitative industry, which not only allows investors to re-examine their investment logic, whether they really understand what money they make and what money they want to make, but also allows managers to wake up from the seemingly easy-to-get 'excess' and reflect on their own ability boundaries and value choices." ”

When the punishment is issued, Lingjun naturally also faces multiple pressures from customers and channels.

"The redemption pressure is not small, because the channel access will be tightened, and it is definitely necessary to maintain close communication with the channel, and then do a good job of appeasement. Emphasizing that your model and fundamentals are okay will further weaken the impact. A medium-sized quantitative private equity fund said.

At the same time, the reporter learned from a number of Lingjun product custodians that Lingjun-related products have not yet encountered very great redemption pressure.

"Style Drift"

Quantify common problems in the industry

Recently, some industry insiders have described this round of quantitative sharp drawdown as an "unprecedented tragedy in the quantitative circle", and it has received a large number of retweets in institutions.

"This kind of drawdown is a very big challenge for both quantitative index enhancement and market-neutral strategies, and may even be the largest drawdown ever seen in the history of A-share quantitative strategies in my career. The relevant person in charge of asset management of a leading brokerage company sighed a few days ago.

And such a "tragedy", in the eyes of many people in the industry, needs more reflection and review, rather than surprise and sympathy.

"Looking back, the transactions crowded under the small and micro style have torn off the fig leaf of the so-called 'machine black box' of many quantitative institutions in the past decade. "For the current quantification in the eye of the storm, the chief of the financial industry of a brokerage company recently felt it.

Compared with the recent large-scale knock-in of the snowball, the large-scale and large drawdown of the net value of quantitative private equity has made many investors feel a little "wronged".

It is understood that most of the quantitative strategies in the domestic stock market are based on the CSI 500 index as the performance benchmark. However, judging from the above-mentioned case of Lingjun Investment, although investors nominally bought the CSI 500 Index Enhancement, in the recent actual operation, Lingjun Investment has allocated a large number of stocks other than the constituent stocks of the CSI 500 Index, of which the CSI 2000 constituent stocks and small micro-cap stocks with smaller market capitalization once occupied a large proportion, and this is also the hardest hit area of the small and micro market earthquake on the eve of the Spring Festival.

According to the reporter of "Daily Economic News", the index increase products of some quantitative institutions have obvious style drift, especially the so-called air index increase that some quantitative index increases are engaged in, which makes the style drift of index increase products serious. Paipaiwang Fortune told reporters that the air index increase can be understood as a "loose" version of the index enhancement strategy, which adopts a quantitative approach to stock selection in the whole market, and will not track any index, so it will not be subject to any index constituents, industries, market capitalization and other conditions. Compared with the traditional index enhancement strategy, the air index enhancement is more flexible.

Hou Yanjun, founder of Primestone Tiancheng Investment, told every reporter that most of the quantitative index increase and neutral strategies that have suffered losses recently are concentrated in the small and micro cap stock selection strategy, and the index enhancement should be the target of the CSI 500, 1000 or CSI 300 indexes, but it is difficult to make excess returns on the stock targets covered by the above indexes, so many quantitative institutions have relaxed risk control, and the strategy has drifted, concentrated in the field of small-cap stocks and micro-cap stocks, and these stocks have poor liquidity, and there will be a stampede when the risk comes.

The chief metalworking officer of a brokerage company told every reporter that such a phenomenon of "style drift" is actually common in the quantitative private equity industry, "These quantitative private placements are almost the same, all rely on small and micro stocks to obtain excess returns, and now after the matter comes out, the whole market knows about it." ”

"In contrast, there is a clear requirement for constituent shares of public index products, which is not less than 80%, while private index products have no restrictions at all. In his view, the reason why quantitative private equity is keen to play "drift" is "mainly because selecting stocks outside the constituent stocks can often obtain excess returns, so this is actually the result of performance orientation." ”

As for the so-called "profit and loss of the same origin", many quantitative private equity seems to have forgotten the hidden liquidity risks that the market may face after tasting the sweetness of "style drift".

The relevant person in charge of the wealth management line of a brokerage company pointed out to every reporter that the problems exposed by the recent quantitative private placement should be related to the extreme style switching, "if the amount of funds is not small, coupled with a large number of fast and large number of transactions, there are high requirements for liquidity, which may bring a great impact in the short term, which is actually similar to the oolong finger incident of a brokerage in 2013." That time it was a 50 constituent stock, and the impact of rapid, large-scale, and one-direction transactions in a short period of time was not small, and it was easy to trigger a chain reaction, which also happened in the United States back then. ”

"On August 6, 2007, probably all quantitative funds in the U.S. stock market retreated by 30 or 40 percent in two days, probably mainly due to the redemption of large head funds, and then the market briefly had a quantitative stampede. The person in charge of the asset management of the above-mentioned brokerage pointed out.

Industry: The quantitative private equity industry may be about to face a major reshuffle

On August 28 last year, the A-share market opened sharply higher and then fell rapidly, which triggered an unprecedented wave of public opinion about quantitative private placement under the disappointment of investors.

▲The trend of the Shanghai Composite Index for a period of time after August 28, 2023 Screenshot source: Straight flush

In the face of huge public pressure, many quantitative giants have spoken out to fight back, including Cai Meijie, chairman of Lingjun Investment.

According to a number of media reports, Cai Meijie reposted an article defending quantification at the time, with the caption: "China quantification has endured too much unwarranted malice, and it is pure ignorance to say that quantification is smashing, which is either stupid or bad." The Chinese quantitative fund, which is always full, is the backbone of the big A. ”

In retrospect, these statements seem ironic. And the incident of Lingjun Investment has also finally brought to light the controversy that has lasted for many years about whether quantification will smash the market.

In recent years, quantitative investment has been repeatedly pushed to the forefront of public opinion, and the focus of related controversies includes the potential transmission effect of the convergence of quantitative trading strategies, and the potential risks of the capital market will be amplified by the continuous expansion of quantitative trading scale. However, many relevant practitioners have always believed that quantitative trading will not only lead to the occurrence of systemic financial risks, but also contribute to the long-term stability of the market to a certain extent. For example, the argument that quantitative trading is "scientific" is very popular in the industry.

However, there is an argument that this clearly ignores the flaws of quantitative trading. In general, quantitative strategies can be divided into fundamental strategies and volume-price strategies, the former pays more attention to the long-term nature of the strategy, and the benefits mainly stem from the difference between the company's value and price, while the latter focuses on short-term volume and price changes, and tends to find the law of investment profits in frequent position adjustment and stock swaps. However, according to the brokerage research report, most of the current domestic quantitative products are deployed in the volume and price trading strategy, and the fundamental strategy accounts for a relatively low proportion.

In addition, the current quantitative trading head effect in the mainland is obvious, coupled with the homogeneity of trading strategies, when the market is faced with the recent situation that leads to the collective failure of quantitative models, the tail risk will be released in a concentrated manner.

For this quantitative tragedy, the relevant person in charge of the asset management of the above-mentioned brokerage company carried out a dismantling. He believes that the risk exposure of this quantitative private placement reflects the obvious shortcomings of some institutions in risk control, "At present, there are some quantitative products in the market, especially those products based on micro-cap stock investment, which are often hedged by the CSI 500 or used the CSI 500 as the performance benchmark. I've never been very receptive to this approach. I think, first of all, for quantification, it is actually very important to find a performance benchmark, and generate a stable and continuous excess based on the benchmark, which is a very important indicator for us to evaluate a quantitative model or quantitative manager. If we are out of risk control, it is actually meaningless to talk about its income and excess level. In recent extreme cases, you will find that this is indeed the case. We have also seen, for example, quantitative hedge funds in the United States, what everyone talks about is what the pure alpha is, that is, under the very strict factor risk constraints, how much excess you generate, which is a very important logic for evaluation. ”

"Many overseas quantitative managers will hire professional institutions to help you (quantitative managers) issue risk control reports, what is your excess throughout the year, what is your excess in terms of risk factor exposure, and what is your actual excess after excluding this part, etc. In fact, we use Pure Alpha as an indicator to evaluate the bottom management every week. So I think that although our fund has had some drawdowns recently, it is clear that the drawdowns are much smaller than those strategies and managers who do not have adequate risk control. He said.

Although from the perspective of international experience, similar to the recent quantitative stampede in the A-share market, the repair may be completed in a short period of time, in the view of some industry insiders, this quantitative large-scale drawdown event may have a far-reaching impact on the quantitative private equity ecosystem.

The relevant person in charge of the asset management of the above-mentioned brokerage company expects that "after this wave of quantitative drawdown, the clearing speed of the entire quantitative fund will be very fast, and I think that the risk control is relatively poor, whether it is a strategy or a manager, may slowly withdraw." This market will gradually return to pure neutral logic, or Pure Alpha logic, that is, the exposure of risk factors between your benchmark performance benchmark and your portfolio, everyone will look at it very strictly. So in the future, if your quantitative model ability is not very strong, in fact, you will not have excess, and you will not be able to continue to survive in this market by relaxing your risk exposure. Therefore, I judge that there will be a relatively large liquidation of the quantitative market in the future, which will also have a good relief from the congestion of quants in the future. ”

In the exchange in the past few days, a person from the wealth management line of a leading brokerage pointed out to reporters that for some quantitative private placements that have recently had public opinion events, they may face greater redemption pressure at the end of February this year, "For example, some investors bought quantitative index enhancement products in 2021, and in 2022 and 2023, they did not make money for investors, because the beta in 2022 and 2023 is very poor, but quantification can be made every year to excess, and finally investors have not lost money for two years." After such a huge drawdown this year, there may be some irrational investors who choose the redemption strategy. ”

A large quantitative private equity person pointed out that in the future, quantitative private equity needs to re-establish faith.

"Quantification is an increasingly standardized development, supporting the good and limiting the inferior is the general direction, and the excess return is attenuating in the long run, but compared with the international market, there is still room for development. A quantitative private equity person in Shenzhen told every reporter.

In the view of the above-mentioned brokerage wealth management linemen, the recent round of quantitative turmoil has exposed the differences in the management capabilities of domestic quantitative private placement, "first, the overall level of our domestic quantitative private placement is not good, and the so-called excess performance is actually a small and micro disk group; ”

In any case, upgrading the iterative strategy is an unavoidable choice for quantitative private placement.

Planning|Li Kai, Zhang Hao

Reporter|Li Na, Wang Haimin, Yang Jian

Edited by Yi Qijiang

Vision|Zou Li

Typesetting|Yi Qijiang

Reporter's Notes丨Success also "drifts", defeat also "drifts"

The drift of trading strategy style is probably the most concerned issue for the market after quantifying this turmoil.

In fact, in extreme cases, some 500 index private equity products can even not buy at all, holding a small micro market in one hand and a large market in the other, and they will still get a lot of excess returns in 2023, and their days will be also crooked.

It's just that in the week before the Spring Festival in 2024, micro-cap stocks collapsed, large-cap stocks were also weak, and only CSI 500 constituent stocks strengthened alone, and products with this strategy were hurt a lot.

The style of the trading strategy drifts in pursuit of higher alpha. This has indeed made quantitative private equity reap a moment of prosperity in the past few years, and finally suffered a blow to the head. Black swans are rare, but they also put a tight spell on quantitative private placements where their trading strategies are seriously drifting. Think about the boundaries of your abilities, make the money you can make, and don't be dazzled by the high excess returns for a while.

National Business Daily