In the past period, whether it was public or private funds, "fixed-income-like" strategies were the best-selling products.

But suddenly, these products became hard to sell.

Especially a type of strategy called quantitative neutral (or quantitative hedging), which unexpectedly saw a continuous decline in net value at the end of September during the "bull market's initial counterattack."

This has somewhat affected investors' "confidence in holding."

In a bull market, has the "hedging business" of quantitative institutions ushered in a "depression moment"?

Private "rocket" rapid retraction

In 2024, a Shanghai-based quantitative private fund not only successfully joined the ranks of billion-yuan private funds but also became the fastest-growing private institution in terms of scale this year.

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According to its official website, this year's management scale even soared from over 5 billion yuan at the end of March to 10 billion yuan at the end of June.

This kind of management scale surged against the trend like a "rocket launcher," which was envied by peers for a while.Yet, this record was shattered during a bull market.

Information from relevant channels indicates that the representative products of the aforementioned private equity firm have actually experienced a drawdown in the recent bull market, especially on September 27th, when the largest drawdown since the product's inception was recorded (see chart below).

This has somewhat "surprised" its holders who are pursuing a stable investment!

Public and private equity funds with similar strategies have also performed poorly.

Moreover, it may be even more surprising that the "failure" of similar strategies is widespread among private quantitative institutions, with many top-tier firms also being "hit."

At the same time, public quantitative neutral (hedged) products have also fallen into a "situation" of net value drawdown.

Observing the table below (source: Tiantian Fund Network, net value performance from September 23rd to September 30th), it can be seen that a considerable number of quantitative hedge products in the industry experienced a certain drawdown during this period.

A report from a securities research institute also shows that from September 23rd to 27th, the average weekly return of public active quantitative funds was 11.79%, with 99.66% of funds achieving positive returns; the average return of public stock market neutral funds was -2.47%, with 0.00% of funds achieving positive returns.

It is evident that in the context of a strong upward trend in the A-share market, the neutral strategy has been "ineffective."Why is the performance lagging behind?

Information from the industry suggests that there are two reasons for the drawdown of market-neutral hedging strategies at the beginning of a bull market.

Firstly, from a probabilistic perspective. Market-neutral hedging strategies involve holding certain long positions (such as stocks, equity funds) and selling certain short positions to achieve alpha returns from the portfolio.

These strategies face a troublesome challenge in sudden sharp rises and falls—namely, the issue of margin calls.

For example, assume a private fund holds a certain futures position through a hedging strategy, such as a one-times index short position. This index futures contract will require at least 12% margin.

However, if the index experiences a significant increase, the private fund will need to replenish a certain amount of margin to maintain its position (and the brokerage firm may consider the bull market conditions and demand more margin). If the product did not have sufficient cash reserves beforehand, there may be a risk of partial forced liquidation of positions in the short term, which could lead to additional trading losses.

But this issue is also easy to resolve. Firstly, the hedging product itself holds long positions in stocks. If futures are forcibly liquidated, the held stocks can also be liquidated, and the two can offset each other without significant losses.

Additionally, later on, management organizations can reduce some leverage and keep more cash on hand to mitigate this issue. Therefore, everyone can see that the rumors about neutral products were not as prevalent after the sharp rise on September 30th.

In fact, on September 27th, there might have been an additional coincidental reason, which is the slow order placement and cancellation on some trading platforms.This may lead to an issue of asymmetric liquidation of long and short positions in product holdings, which could additionally result in some trading losses.

Overall, managers of quantitative neutral strategies need more experience and more strategic space to handle this issue.

Future prospects?

Is there still a future for quantitative neutral hedging strategies in the product matrix of public and private institutions?

This is a very worthwhile question to explore.

Firstly, if the main investment market experiences a one-way, sustained bull market in the future, then neutral strategies may have to go through a period of "hard times."

It's simple: the value of quantitative neutral strategies, which have a certain trading threshold, is to provide rare positive returns in the market when market opportunities are scarce.

Both changes in the trading environment and competitive strategies may lead to periodic changes in the market space for such products.

Secondly, as a strategy, quantitative neutrality will not disappear; through evolution and iteration, it may find new opportunities for development.In fact, there have been numerous attempts in this area within the industry.

Dating back to May 2021, Quantitative Phantasy introduced a neutral hedging strategy product with a "zero redemption fee" policy, encouraging holders to redeem products of this strategy.

This move was mainly considered because the investment cost-effectiveness of neutral products was greatly reduced under the market conditions at that time, and private institutions actively reduced their management scale to promote the improvement of the market ecosystem.

At the same time, with the help of new changes in the capital market, quantitative neutral strategies do not rule out finding some new trading strategies with higher cost-effectiveness.

If such progress emerges, then these strategies may have other development spaces.