On Tuesday, 2022.04.19, the weather was cloudy with light rain. Quantitative hedging and arbitrage contains three concepts.

1. Concept

(1) Quantification

"Quantification" refers to the use of statistical methods and mathematical models to guide investment. Its essence is the quantification of qualitative investment. practice.

Quantitative industries: non-financial industries interested in quantification, financial engineers, financial industry IT personnel, investment positions, finance or engineering college students

(2) Hedging

< p> "Hedging" refers to obtaining relatively stable returns by managing and reducing portfolio system risks in response to changes in financial markets.

"Quantitative hedging" is a combination of the two concepts of "quantification" and "hedging". In practice, hedge funds often use quantitative investment methods, and the two are often used interchangeably, but quantitative funds are not completely equivalent to hedge funds.

(3) Arbitrage

Arbitrage is also called spread trading. Arbitrage refers to buying or selling a certain electronic trading contract while simultaneously selling or buying another related contract. A contract.

Arbitrage trading refers to the trading behavior of taking advantage of the price difference changes between relevant markets or related electronic contracts to conduct transactions in the opposite direction on the relevant markets or related electronic contracts in order to profit from changes in the price difference. .

Arbitrage trading models are mainly divided into four major types, namely: stock index futures arbitrage, commodity futures arbitrage, statistical and option arbitrage.

Arbitrage trading can be divided into two types: one is futures arbitrage, that is, arbitrage between futures and spot goods; the other is arbitrage between different months, different varieties, and different markets in the futures market. Arbitraging the price difference between stocks is called spread trading. According to different operating objects, spread trading can be divided into three types: intertemporal arbitrage, cross-variety arbitrage and cross-market arbitrage.

Intertemporal arbitrage. According to the different trading positions established by traders in the market, intertemporal arbitrage can be divided into: bull market arbitrage, bear market arbitrage, butterfly arbitrage, and condor arbitrage.

2. Quantitative hedging procedures and methods

1. Objects of quantitative hedging programmed transactions: stocks, bonds, futures, spot, options, etc.

2 .Quantify the operation process of hedging products. First use quantitative investment to build a long stock portfolio, then short stock index futures to hedge market risks, and finally obtain stable excess returns.

3. Specific methods of quantitative stock selection. Quantitative investment generally selects hundreds of stocks for investment analysis to diversify risks, and is suitable for investors with low risk preferences and the pursuit of stable income. Quantitative analysts build a model after formulating the rules, and first backtest it using historical data to see if it can make money; if so, they inject small amounts of capital and accumulate real transactions outside the model. If there is a profit after the firm offer is made, the amount of funds will be expanded to determine whether it will have an impact on the investment results. The models that were finally run were all refined.

3. Types of quantitative hedging strategies

1. Stock market neutral strategy. This strategy, also known as Alpha strategy, is one of the most commonly used strategies among domestic private securities investment funds. It starts from the perspective of eliminating market systemic risks (Beta) and hedges market risks by simultaneously constructing long and short positions in order to obtain more stable absolute returns. Usually, while buying stocks, short-selling stock index futures with the same market value as the stocks (you can also use securities lending), you can not only hedge market risks, but also obtain excess returns brought by individual stocks.

2. Long-short stock strategy. This strategy has either long or short exposure. The operation of the stock long-short strategy is difficult, because in addition to selecting the target, it is also necessary to judge and time the long and short market. Because of this, the current quantitative long-short strategies are often based on momentum strategies, that is, when the market has seen a relatively obvious upward trend or downward trend, corresponding adjustments will be made.

3. CTA (futures management) strategy. The CTA strategy is called a commodity trading advisory strategy, also known as managed futures. Commodity trading consultants make predictions about the trend of investment targets such as commodities, and use derivatives such as futures and options to carry out long, short or long-short investment operations, providing investors with access to traditional stocks, bonds and other asset classes. external return on investment. Futures management strategies are generally divided into financial futures and commodity futures.

4. Arbitrage strategy. The most common arbitrage strategy is secondary market arbitrage, including commodity inter-temporal and cross-variety arbitrage, stock index futures inter-temporal, futures and spot arbitrage, ETF inter-market, event arbitrage, delayed arbitrage, etc. The principle of the arbitrage strategy is that when the prices of two or more related products are mispriced, during the price return process, profits are made by buying relatively undervalued varieties and selling relatively overvalued varieties. Among all quantitative investment strategies, the arbitrage strategy has the most certain profit margin and the lowest risk.

Domestic quantitative arbitrage strategies mainly include five commonly used financial tools: risk-free arbitrage, precious metal arbitrage, commodity futures cross-border arbitrage, stock intraday strategy, and high-frequency market maker strategy.

Generally used arbitrage strategies mainly include ETF arbitrage, futures arbitrage, option hedging and volatility arbitrage.

ETF arbitrage strategies look for price deviations, place orders quickly, and obtain "cash-to-cash" arbitrage returns. Futures and current arbitrage automatically monitors the futures and current price differences of multiple varieties on multiple exchanges in real time and relies on statistical arbitrage models to obtain sustained and stable income. Option hedging uses the exercise of options to provide institutional clients with a more flexible hedging solution. Volatility arbitrage is a strategy aimed at delta neutrality. Earn profits from the dimension of implied volatility.

4. ETF arbitrage strategy.

Index stock fund ETF is essentially a security that tracks an index, industry, commodity, or other asset. It has a related price and can be traded on the stock exchange like ordinary stocks. For example, the SSE 50 ETF consists of 50 blue-chip stocks from various industries including China Construction, Sinopec, Ping An, Guotai Junan, Yili, Kweichow Moutai, etc.

This kind of index fund composed of a basket of stocks is like a fruit gift box. There is a price difference between the gift box and the bulk. Since there is a difference in prices, we have an arbitrage opportunity.

In ETF arbitrage, there are generally two arbitrage behaviors, discount arbitrage and premium arbitrage. This operation requires deducting various transaction fees and costs.

1. Discount arbitrage. When traders find that the trading price of the ETF secondary market is lower than the net price of the primary market, the trader buys the ETF at a low price in the secondary market and redeems the ETF statically in the primary market, that is, using ETF funds Exchange for a basket of stocks, and then sell the exchanged stocks in the secondary market to convert them into cash.

2. Premium arbitrage. This is done when the ETF price in the secondary market is higher than the net value in the primary market. Traders buy a basket of stocks corresponding to the ETF from the secondary market, and then use this basket of stocks to purchase ETFs from the fund company in the primary market. That is, they exchange the basket of stocks for ETF funds, and the obtained ETF funds go to the secondary market of ETFs. Sell ??it at the transaction price (high price) to get cash, thereby realizing a "cash-to-cash" arbitrage transaction.