Derivative strategy private equity funds have been under pressure recently, after many assets experienced the largest historical drawdown and attention was drawn to the exit of neutral strategies. On the afternoon of October 23rd, the company issued a public announcement through its official account regarding a major adjustment in company strategy and offering compensation to investors. The company stated that their options arbitrage strategy had suffered significant losses, leading them to no longer promote neutral strategies. This news caused a stir in the market. Many industry insiders linked this event to recent moves by Ningbo Magic Quantitative Fund to abandon neutral strategies. Speculations about the abandonment of neutral strategies by quantitative funds were once again on the rise. However, many quant private equity firms, especially those with more hedging products, do not agree with this view. Some pointed out that during the extreme market conditions in February and September of this year, many hedge products experienced significant drawdowns. But this does not mean that neutral strategies in the entire industry should be denied. As a form of investment product, neutral strategies still possess investment value. The Magic Quantitative Fund is not large in scale and does not represent industry trends. Additionally, the use of options for hedging by the fund is not mainstream compared to using stock index futures. Magic Numerical Assets Abandon Neutral Strategy Products In an announcement to investors, Magic Numerical Assets informed them that they would no longer promote neutral strategies. This decision was made due to a significant change in market conditions, with their options arbitrage strategy suffering heavy losses. After internal discussions, the company decided to adjust its main strategy to a long exposure strategy in the future. Furthermore, in an effort to compensate for investor losses, if existing investors are interested in investing in the new strategy, the company will consider offering permanent waivers on performance fees and other discounts. Since September 24th, market sentiment has been high, with long positions in subjective performance rebounding, but extreme upward movements have led to drawdowns in derivative neutral strategies. For example, Magic Numerical Rich Harvest Arbitrage 3 fund saw a decline of 6.54% from September 30th to October 11th, with a year-to-date return of -13.53%. On October 16th, Magic Numerical Assets stated that, due to significant market volatility, their options products experienced historically significant drawdowns. In order to quickly repair the net value, the company decided after internal discussions to temporarily suspend management fees for their options products. On October 16th and 22nd, Magic Numerical Assets announced that their Magic Numerical Rich Harvest Arbitrage 3 fund and Magic Numerical Rich Harvest Arbitrage 5 fund would temporarily reduce their management fees to 0 within the next month. The neutral strategy used by Magic Numerical Assets employs an option volatility arbitrage model. A broker told the reporter that recent options volatility had been unusually high, reaching historical extremes. Volatility arbitrage is based on statistical regression, and historically, abnormal arbitrage opportunities have appeared. However, in cases of extreme historical situations where anomalies continue to grow rather than converge, entering into these opportunities may lead to significant unrealized losses. "If the positions are not high enough to withstand the unrealized losses and avoid liquidation, then the unrealized losses may eventually be recovered as the anomalies converge, resulting in a significant drawdown. But if the losses lead to liquidation, then the unrealized losses become realized losses." The broker further stated that the reason for Magic Numerical Assets abandoning neutral strategies may be more related to client pressures. The extreme situations in options trading causing significant drawdowns led to the conclusion that for many clients, the cost of maintaining the channel was too high, making continuing with neutral strategies unprofitable. Industry Reminders: Prevent Redemptions Due to Misunderstandings "After the incident involving Magic Quantitative Fund, the significant drawdown and abandonment of neutral strategies by Magic Numerical Assets, we are concerned that the market may misunderstand the entire hedge product industry, leading to panic redemptions from clients," said a quant private equity professional. Many institutions have promoted hedge products as low volatility products in the past. For instance, many institutions have compared options to snowball structured products when introducing them to clients. But now the market is in a "re-education" stage. Firstly, options products are not low volatility products, especially in extreme market conditions where drawdowns can be substantial. In reality, the neutral strategy products of Magic Numerical Assets do not primarily rely on stock index futures like traditional options products, but instead use options for hedging, which is not mainstream in the current market. Additionally, the quant professional suggested assessing the stockpiles of various market neutral products to prevent the risk of concentrated redemptions in the near future. Market neutral products normally have stable funds, but concentrated redemptions could have a negative impact on the market. According to data from a leading quant private equity firm, as of the third quarter of this year, the firm manages over 65 billion in assets, with 16 billion in hedge products, accounting for about 25%. "After the convergence of stock index futures hedging basis, the net value of the drawdown can recover. Institutional investors are relatively mature and will remain calm, but individual investors may feel anxious when they see drawdowns," the professional pointed out. For institutional clients, market neutral products still have their value as allocation tools. For individual clients, decisions should be made based on their risk preferences, return expectations, and portfolio composition. The future changes in the market are unpredictable. The recoveries from several market drawdowns this year show the importance of accompanying clients during such times. Some industry insiders have noted that market neutral products are often compared to timed deposits and bond strategies for their yield rates. In a low-interest rate environment, market neutral products still have some value in terms of allocation. However, it is necessary to communicate more with individual investors to enhance their understanding of factors affecting excess returns and changes in basis. Moreover, more institutions are recognizing the importance of asset allocation. When considering how to respond to or whether to follow suit in abandoning neutral strategies, some institutions have indicated that they will continue to build and improve a diverse product line to meet different client needs. Matching client risk preferences with product risk-return ratios will continue to be crucial.Features should be further adapted; investors should also have a deep understanding of the risk-return characteristics of the products they hold, and look for products that match their risk preferences and investment horizons.This article is reprinted from "Cailianshe", GMTEight editor: Jiang Yuanhua.