Thanks to the company's boss's new business direction requirements in the second half of 2024, we began to engage with many quantitative asset management teams in the Chinese community. Our role is similar to a Fund of Funds (FOF) institution in the crypto space, like WL Capital in Shenzhen. We have internal quantitative teams for proprietary asset management and allocate a significant portion of positions to external quantitative teams, representing a diversified investment approach with multiple quantitative teams and strategies. Therefore, starting from the second half of last year, we gradually participated in roadshows from around 70 to 80 quantitative and subjective teams from mainland China, Taiwan, Singapore, Dubai, Europe, and the US (with the vast majority being quantitative). Ultimately, we invested in about a dozen teams, with strategy types including high-frequency CTA, medium to long-term CTA, statistical arbitrage, funding rate arbitrage, cross-sectional strategies, machine learning/deep learning, and subjective strategies. The performance of external quantitative teams has not been satisfactory overall, with some doubts about life from our boss at the beginning of this year.................
1, First, let’s talk about the subjective part, which can be said to be the first type to be eliminated. We initially invested in two subjective traders, one from Hong Kong and one from Taipei. However, the guy from Taipei couldn’t last through the first month’s observation period and lost us 10% of our control line, ultimately resulting in a -12% performance that we liquidated—failure. The Hong Kong trader fared slightly better, lasting 3 months without hitting the stop-loss line, but by the third month, he was underwater by about 8%, close to the risk control line. He then maintained a very low position, and our boss felt it was pointless, so he stopped the account, which was also a failure. Both traders gave exaggerated performance expectations during the roadshow, claiming they could double returns (of course, I personally didn’t believe this), but the actual results were vastly different....... Last month, another subjective trader joined, and I was shocked when I checked the account a few days ago; I quickly reported to the boss. Below is a screenshot of the account holdings at that time; it’s purely a gamble with investors' money, so I personally don’t like this kind of subjective trading; unfortunately, the boss has the money and is big-hearted.
Speaking of this, I want to mention an interesting phenomenon I observed earlier: when a company has both subjective and objective departments competing simultaneously, in a bad market, it's usually the subjective department that gets fired first........... Because good subjective traders are rare, most end up losing money. Moreover, subjective trading generally pursues high returns, leading to relatively large fluctuations. When the company is losing money, the boss's mood is generally not good, making them more likely to take it out on these traders..........
2, Statistical arbitrage and cross-sectional hedging strategies are a type of strategies that we have loved and hated. Here, statistical arbitrage is somewhat different from funding rate arbitrage or futures arbitrage; it resembles pair trading, involving one cryptocurrency against another, with a holding structure similar to cross-sectional strategies, so I’ll discuss them together. Most teams disclosed performance expectations during roadshows of an annual return of about 50-70%, with drawdowns of 6-10%, and a Sharpe ratio generally above 4.
In fact, these types of strategies performed quite well before December last year, giving the boss a lot of confidence. Hence, we continuously increased AUM for these types of strategy teams, as they seemed stable and profitable. However, after entering December 2024, these strategies began to deteriorate, and due to positions added at high levels, the initial small-scale profits quickly got wiped out, especially during January and February of this year, with consecutive drawdowns. Ultimately, one team liquidated at around -7%, while another cut losses near -10%. The remaining teams are still running, and recently, in May, their performance has recovered somewhat, but overall it still falls far short of the performance expectations presented during roadshows.
3, Funding rate arbitrage strategies. These types of strategies are relatively worry-free, as the chances of loss are minimal. However, the downside is that they are reliant on market conditions; when the market is good, returns are decent, leading to a steady happiness: when the market is poor, they become worthless, and those returns are negligible. We got in on these strategies at a bad time, starting investments in November last year, just as the last market peak hit. Now, nearly 6 months later, we have been in a period of very low market funding rates. We only invested in one team from Taipei, which has an annualized return of only 3% now—truly negligible.........
Funding rate arbitrage strategies are expected to have a banner year in 2024, with most teams easily achieving annualized returns of 15% or more, and those reaching 24% or more considered excellent. For example, a team I collaborate with in Beijing had an annualized return of 30% last year, which is quite good. However, this year their strategy has yielded much lower returns, with almost no opening opportunities in January and February. The potential of these strategies is visibly shrinking, as more large funds enter the market, saturating the perpetual short side. Unless a major bull market occurs, it will be challenging to see the good times of the past return; this is another strategy heading towards decline.
Going for a meal, to be continued..............
Because I’ve been caught in the rain, I want to lend a hand to the newbies just entering the market to help them avoid the biggest risks!!!
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