Fake Foreign Capital And Real Quantification Boost The Flames: Implied Leverage And High-Frequency Double Risk Of A-Share Trillion Transaction

Quantitative private placement has come to the forefront again.

As the news that "head quantitative private placement is guided by the window" is gradually subsided, an information that the main foreign investors in the A-share market is not the overseas funds, but the mainland quantitative fund giants who have obtained the license in Hong Kong - they have five times of capital allocation in Hong Kong - operate frequently in the A-share market and expand rapidly.

When the Shanghai composite index was still fluctuating around 3600, the turnover of the two markets had exceeded trillion yuan for 40 consecutive trading days, doubling the turnover of previous months, approaching the bull market record of breaking trillion yuan for 43 consecutive trading days in 2015.

The whole market is paying attention to where the incremental funds come from? What do these funds do?

At the same time, foreign capital continues to flow in. According to the data of the stock exchange of Hong Kong, compared with July this year, the scale of foreign capital holding more than doubled in August through the "Shanghai Hong Kong stock connect" and "Shenzhen Hong Kong stock connect".

Many Hong Kong Securities people interviewed by the 21st century economic report said that they noticed the information of the head quantitative institutions' capital allocation in Hong Kong. Generally speaking, investment banks can provide 4-5 times of leverage to their clients. "If an institution has QFII qualification, it will cost less to find securities companies to allocate capital. If there is no QFII qualification, the annualized cost of providing channels is about 4%, and there is also the use of income swap mode."

Advantages of offshore capital allocation: low cost and high leverage

It is not a new game for Hong Kong to invest in a shares.

In 2019, a regulatory letter issued on the official website of the securities and Futures Commission of Hong Kong pointed out: "at present, the price of Hong Kong's capital allocation is only half of that of the mainland. Hong Kong's capital price has great advantages, and the leverage level can be relatively high. Many domestic funds are allocated through Hong Kong and then detoured back to a shares."

For this reason, Li Xiaojia, then the chief executive of the Hong Kong stock exchange, stated that he did not think it was easy to allocate capital in Hong Kong, let alone to raise funds by tens of times of leverage. At the same time, Hong Kong securities companies had very strict margin management.

Although the financing leverage is not as high as dozens of times, the advantage of lower cost of financing than the mainland has been recognized by the industry.

A Hong Kong Securities personage from Guotai Junan International Holding Co., Ltd. told the 21st century economic reporter that in the Hong Kong market, the cost of capital allocation of foreign private banks is relatively low. The annual interest rate of about 2% is usually to find private banking institutions, and the allocation of capital with 5 times leverage is also feasible.

In the mainland market, from the margin trading business of securities companies, the financing cost is about 6-8% annualized interest rate, and most of the leverage is about twice.

In order to win over customers, Hang Seng once exempted the service charge for subscription of new shares during the listing period of Netease in Hong Kong. If it applies for a new share loan, it can enjoy the annual interest rate of the preferential loan, with the actual annual interest rate of 1.9%. Daxin bank provides a loan interest rate of 1.68% for higher loan users. Customers who come to Daxin branches to apply for new shares subscription loan of Netease can be exempted from handling charges. If the loan amount reaches RMB 500000-5000000, the loan interest rate will be as low as 1.68%.

According to the data of the stock exchange of Hong Kong, compared with July this year, the scale of foreign capital's increasing holdings of stocks in Shanghai and Shenzhen stock exchanges has more than doubled in August. Visual China

Three paths to a shares

Driven by the benefits of low cost and high leverage, a part of the institutions pursue the distant and offshore financing.

The securities personage of China Merchants Securities International Co., Ltd. introduced that they do not have such business at present. According to his understanding, the financing cost of QFII qualified institutions is lower.

According to public data, Ningbo magic square, a quantitative hedge giant with a management scale of more than 100 billion yuan, has established a Hong Kong Branch, magic square capital management (Hong Kong) Co., Ltd.

It is reported that magic square quantification is a hedge fund company that relies on Mathematics and computer science for quantitative investment. The founding team started the research and practice in the field of quantitative hedging in 2008. Relying on systems, models and risk control, the founding team has grown into a mainland quantitative private equity giant.

At the same time, magic square capital management (Hong Kong) Co., Ltd. obtained the approval of qualified foreign investor qualification from the regulatory authority in December 2020. At the same time, the company is required to strictly abide by the relevant provisions in the process of carrying out the business of QFII, perform its duties and assume responsibilities according to law.

"With QFII qualification, that is, after obtaining the qualification of qualified foreign investors, overseas raised funds can be directly invested through QFII channel." Hong Kong Securities people believe that this method has the least restrictions and the lowest cost.

The other is that institutions without QFII qualification need to enter the A-share market through channels. The requirements of different channels will be different, so the cost will be slightly higher.

According to relevant people of Yingtou securities, which works in Hong Kong, institutions can also operate through income swap.

The so-called "income swap" is mainly provided by securities companies. The general process is as follows: private placement and securities companies sign off-site agreements on cross-border usufruct swap, and then pay fixed costs to the securities companies every year, so as to open accounts in overseas subsidiaries of securities companies and realize overseas stock allocation. In this process, the fixed income paid by private placement is used to exchange the specified stock return, so it is called "income swap".

According to Yingtou securities, there are two types of income swap business, i.e. the north up business is mainly private placement, and the margin is paid at the Hong Kong Securities Dealers. According to their qualifications, the securities companies can provide them with different levers.

Previously, the mainland private equity giant Ming Kai Investment related people have said that through the Hong Kong subsidiary of mainland securities companies, the company copies its investment strategy to the mainland through the "income swap" channel of overseas fund assets.

Leverage and high frequency risk

In fact, regulators have already noticed the situation.

On September 6, when attending the 60th World Federation of exchanges (WFE) general meeting and annual meeting in 2021, chairman Yi Huiman of China Securities Regulatory Commission (CSRC) talked about the supervision of new trading methods such as quantitative trading.

He pointed out that quantitative trading and high-frequency trading can not only enhance market liquidity and pricing efficiency, but also easily lead to transaction convergence, increased volatility and violation of market fairness. At the meeting, Yi Huiman also said that in recent years, quantitative trading in the Chinese market has developed rapidly. What does the exchange think of the capital structure and new trading instruments? I hope you can think about it.

Industry insiders also believe that leveraged capital is a double-edged sword for institutions. Paying margin can exchange for stock returns, which is also a kind of leverage operation, which will enlarge both income and risk. In addition, high-frequency trading is easy to induce speculation and speculation, which can easily lead to sharp rise and fall.

"From the recent developments, we can see that the current quantitative private equity institutions are controlling the scale, and this trend is still spreading," said a quantitative private equity source in Shenzhen

In addition, for the original high-frequency or t0 quantitative strategy, the quantization organization is trying to add other strategies, because there are more new t0 products in the past two years, and the transaction frequency may be limited in the future.

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