Trading in the Year of the Dragon has just begun, and quantitative trading has once again been pushed to the forefront.
Before the Spring Festival, against the background of sharp fluctuations in the A-share market, many quantitative products suffered heavy blows, with large excess retracement. Data shows that at least more than a hundred quantitative private equity products fell by more than 10% in the week before the holiday, and some products have given back last year's full-year profits, including products under the tens of billions of quantitative private equity products. After this round of decline, 85% of quantitative private equity products are currently experiencing losses.
Regarding the impact of the retracement of the quantitative industry, a number of tens of billions of private equity firms such as Jiukun Investment and Huanfang Quantitative have recently issued product operation descriptions to reflect and review the recent net value retracement of their products. So, what are the reasons for the massive retracement of quantitative products this time? What problems are exposed behind the scenes?
Quantitative products suffer heavy losses
Since 2024, the A-share market has entered into adjustment again, and the previously prosperous small and micro-cap style "braked" before the holiday. Data show that as of February 8, the Wind micro-cap index has fallen by 27.49% year-to-date, falling by nearly 30% in just over a month; the CSI 1000 and CSI 2000 indexes have fallen by 15.19% and 27.49% respectively during the year.
With the change in style, many quantitative private equity products have experienced sharp retracements. Wind data shows that more than 4,800 quantitative private equity funds with data as of February 20 have suffered an average loss of 3.42% since February, and more than two-thirds of the products have experienced retracement. So far, the average loss of quantitative private equity funds this year has been 8.07%, and the proportion of loss-making products has exceeded 85%.
Among them, more than 130 products have fallen by more than 20% since February, among which quantitative long strategies were the hardest hit, accounting for more than 60%. For example, Zhipinlong Tiangui Quantitative No. 2 and Xincheng Quantitative Quadratic No. 1 both fell by more than 50% in this range; Hengsui Jiye Evergreen-Family Exclusive No. 3 and Xincheng Quantitative No. 1 both fell by more than 45%.
Judging from the situation in the week before the holiday alone, Wind data shows that from February 5th to 8th, there were 149 quantitative private equity funds with a single-week decline of more than 10%, including 50 quantitative long strategy private equity products. The losses of some of these products have exceeded the returns for the whole of last year. For example, the Mengxi National Securities 2000 Index Quantitatively fell 31.87% in a single week on the 2nd, while the annual return in 2023 will be 11.24%.
After this round of decline, the number of quantitative private equity funds that fell by more than 20% during the year has exceeded 530, and 120 have fallen by more than 30%. The reporter noticed that among the segmented strategies, products tracking the CSI 500 and CSI 1000 indexes were significantly dragged down, with average declines of 11.89% and 19.06% during the year.
Many of them are products of tens of billions of quantitative private equity. For example, the Jiulun Qianyu CSI 1000 Index Enhanced Exclusive No. 7 and the Jiulun Qianyu CSI 1000 Index Enhanced Exclusive No. 8 under Jiukun Investment have fallen by 28.36% and 28.35% respectively since the beginning of the year; Huufang 500 Index Enhanced Xinxiang No. 21 and Huufang 1000 Index Enhanced Xinxiang No. 2, both owned by Magic Square Quantitative, have both fallen by more than 20%.
The reporter noticed that not only quantified private equity products, but also quantified public offerings had similar situations. Wind data shows that as of February 20, the average decline during the year for 499 quantitative funds with available data (only initial funds are counted) was 7.68%. This year, 30 fund products have experienced a drawdown of more than 20% during the year.
Among them, Dacheng Dynamic Quantitative A, Nuoando Strategy, and CITIC Prudential Multi-Strategy A all fell by more than 10% in the week before the holiday. The cumulative returns of these three products this year have been -38.07%, -34.58%, and -28.61% respectively, ranking among the top decliners. In 2023, they all achieved positive returns, which also means that they gave up last year's gains significantly in just over a month.
Why the massive retracement?
Because some quantitative products have reached extreme values in terms of net value drawdown and excess drawdown, which has caused dissatisfaction and panic among some investors, quantitative trading has once again been pushed to the forefront. Recently, a number of leading private equity firms have successively released product operation descriptions, reflecting on and reviewing the recent net value retracement of their products, and strengthening communication with investors.
The aforementioned Jiukun Investment stated that since 2024, especially since late January, the A-share market has experienced continuous extreme market differentiation in large and small markets that exceeds historical extreme values. Quantitatively speaking, short-term performance has been greatly impacted, mainly by extreme styles and costs.
"On the long side, the diversified investment approach of quantitative strategies will not concentrate most positions within index constituent stocks. Although we will strictly control the exposure of large and small-cap factors in risk control measures, we are still adversely affected by the strong differentiation of styles." Jiukun Investment said that the market rebounded in the week before the Lunar New Year, but the main gains were concentrated in several major broad-based index constituent stocks, and small and medium-sized market capitalization stocks were still under pressure.
Magic Square Quantitative has a similar statement: "The overall holdings of quantitative institutions are relatively dispersed, and index enhancement strategies also select stocks from the whole market and track the corresponding broad-based index based on historical data. For example, our single product positions are basically more than 2,000, and a large part of them are in small and medium-sized market capitalization stocks. It is difficult to adapt to such historical extreme market conditions, and we will underperform significantly."
"Many quantitative index increases running in the market today, especially the CSI 500 and CSI 1000 index increases, are actually stock selections from the entire market, rather than strictly selecting stocks within the index component range." Some people in the private equity industry also told reporters that the index enhancement strategy, as the mainstream strategy of quantitative investment at the moment, is generally operated with full positions and is greatly affected by market fluctuations.
Taking the products of Jiukun Investment as an example, from the perspective of average holding style, the average market capitalization style of the 500 index increase products is between the CSI 500 Index and the CSI 1000 Index, and the average market capitalization style of the 1000 index increase products is between the CSI 1000 Index and the CSI 2000 Index. In other words, when positions are highly dispersed, when encountering extreme historical market conditions with very concentrated increases, the proportion of stocks that can participate in the surge is not high, and the long strategy will be affected by this and cause a large excess retracement.
So, when faced with market style changes, how should quantitative products manage risks and reduce the magnitude of retracements? In addition to market factors, what are the other reasons why quantitative funds suffer retracement?
According to Magic Square Quantification, the main reason for the large excess drawdown of products is the unsatisfactory response to different environmental strategies. "Reflecting on our strategy, we found that it did not show good adaptability in the face of short-term extreme markets. The investment portfolio based on the whole market stock selection structure has a large gap with the index, resulting in an obvious excess drawdown; the drawdown revealed that the strategy still needs to be optimized in terms of factor iteration and risk control management."
The reporter noticed that in early February, there were public offerings in response to quantitative products. On February 1, China International Finance Fund stated in a "Letter to Investors of China International Finance Quantitative Fund" that "the occurrence of a retracement does not necessarily indicate a problem with the effectiveness of the model. Excessive performance requires a certain time interval to be observed."
China International Finance Fund believes that market retracement is a normal phenomenon and cannot be avoided whether it is traditional investment or quantitative investment. Market volatility is constant, and although the model has been fully tested and optimized, at some moments, the market environment may switch and change in ways that exceed past thresholds.
Yanfu Investment stated that it did not adjust risk control parameters during this round of corrections and traded normally in its usual style. As for the reasons for this operation, he said that based on the experience of several alpha liquidity crises in the history of the US stock market and the collective sharp retracement of alpha in A-shares at the end of 2014, at this stage, as long as the product does not passively terminate operations due to liquidation, hitting the stop loss line, etc., and there is no human intervention in the quantitative model, the final excess will be naturally repaired in a short period of time.
Column Editor: Zhang Wu
