Abstract: In recent years, open-end funds have made a breakthrough in China. But at the same time, China's securities market still lacks common hedging tools such as stock index futures, which makes the risk avoidance of open-end funds in China have great defects. With the formal establishment of China Financial Futures Exchange in Shanghai on September 8, 2006, stock index futures will be launched soon. This paper analyzes the characteristics and risks of open-end funds and the functions of stock index futures, and based on this, expounds the functions of stock index futures in the risk management of open-end funds.

Keywords: open-end fund; Stock index futures; risk management

Since the era of 199O, the fund industry has experienced rapid growth. Under the background of China's entry into WTO, open-end funds have also become one of the main development directions of China's fund industry. As of June 2006 165438+ 10, there were 249 open-end funds in China, far exceeding the number of 54 closed-end funds. Standardized institutional investors, represented by open-end funds, are playing an increasingly important role in the development of China's securities market. As a kind of financial innovation, open-end fund will play a powerful role in promoting the sustained and healthy development of China's securities market and connecting with the international capital market.

However, with the in-depth development of open-end funds in China, some problems are gradually exposed. International experience and the practice of closed-end management fund companies in China prove that funds are high-risk industries. Without a rigorous and perfect risk management mechanism, the development of open-end funds will face great risks. With the formal establishment of China Financial Futures Exchange in Shanghai on September 8, 2006, stock index futures will also be launched. In this case, it is of great practical significance to study stock index futures to prevent the risks of open-end funds in China.

First, the characteristics and risks of open-end funds

Open-end fund refers to a fund whose total amount of fund issuance is not fixed, and the total number of fund units increases or decreases at any time. Investors can purchase or redeem fund shares in the business premises stipulated by the state according to the fund quotation, and the price of purchasing or redeeming fund shares is calculated according to the net asset value of the fund.

(A) the characteristics of open-end funds

Open-end fund is a kind of fund type relative to closed-end fund, and its characteristics are relative to closed-end fund.

1. The size of the fund is not fixed. Closed-end funds have a closed period, during which the fund share is fixed. Even if the operation is successful, the fund share cannot be expanded. The share of open-end funds is variable. Generally, three months or half a year after the establishment of the fund, investors can subscribe for new fund shares at any time, and they can also redeem their investments from the fund management company at any time. Therefore, the scale of well-managed open-end funds will become larger and larger; However, the scale of open-end funds with poor performance will gradually shrink until the scale is less than a certain standard.

2. The unpredictability of the fund term. Closed-end funds usually have a fixed duration, and when they expire, they can be extended with the approval of the fund holders' meeting and the consent of the regulatory authorities. However, open-end funds have no fixed duration. If the fund operation is approved by the fund holders, it can continue to operate.

3. The transaction price depends on the net asset value of the fund unit. The transaction of closed-end funds takes place in the secondary securities market, and its transfer price follows the market in the trading market, which is influenced by the stock market, the relationship between capital supply and demand and other fund prices. The transaction price of open-end funds is determined by the fund manager according to the net asset value of the fund unit and published once every trading day. Whether investors purchase or redeem fund shares, they trade with the net asset value of fund shares announced on the same day. This price is not affected by the fluctuation of the securities market and the supply and demand of the fund market.

4. The particularity of the transaction mode. Closed-end funds are generally listed on the stock exchange or transferred over the counter, and transactions are conducted among fund investors. Only when the fund initiates subscription and the fund is closed for liquidation, transactions are conducted between fund investors and fund managers or their agents. However, the trading of open-end funds has always been between fund investors and fund managers or their agents (such as business outlets of commercial banks and securities companies), and there is no trading behavior between fund investors.

5. The information disclosure of net assets is more open. Closed-end funds do not need to publish their net assets on a daily basis, but generally on a regular basis (China's securities investment funds are published once a week), and fund management companies do not directly accept the subscription and redemption of funds. For open-end funds, the fund management company shall publish the net asset value every day, and accept the subscription and redemption business of the fund every day according to the transaction price determined on the basis of the net asset value.

(B) the risks of open-end funds

Although open-end funds have the advantages of expert financial management and risk diversification, it does not mean that open-end funds are risk-free. Open-end funds mainly face the following risks:

1. Liquidity risk. The liquidity risk of open-end fund refers to the risk that the fund assets cannot be converted into cash quickly, so it cannot meet the possible redemption needs of investors, which is manifested in three forms: first, the payment risk caused by insufficient liquidity of assets and the inability to meet the redemption needs of investors in time; Second, the operational risk caused by the failure to absorb funds at normal prices; The third is the possible losses due to price uncertainty in the process of realizing the assets held.

2. The risk of unknown purchase and redemption prices. The subscription quantity and redemption amount of open-end funds are calculated according to the net asset value of the unit on the trading day of the fund plus or minus related expenses. When investors purchase and redeem fund shares on the same day, the reference unit net asset value is the data of the last fund trading day. However, investors can't predict the change of the net asset value of fund units from the previous trading day to that trading day, so investors can't know at what price when purchasing and redeeming. This kind of risk is the risk that the purchase and redemption price of open-end funds is unknown.

3. Systemic risk. Fund investment has the function of dispersing risks, but due to the inherent risks in the stock and bond markets, open-end funds will inevitably suffer losses. For example, when open-end funds invest in the stock market, the stock price of listed companies is not only affected by their own performance and industry, but also by macro factors such as government economic policies, economic cycles and interest rates, which makes the stock price show an uncertainty. Especially when there is an emergency in the fund investment market, both ordinary investors and fund management companies may face greater risks.

4. Non-systematic risk. The unsystematic risks faced by open-end funds include many aspects, mainly including market risk, interest rate risk, purchasing power risk, management risk and operational risk.

5. Force majeure risk. That is, the risks brought to fund investors when force majeure such as war and natural disasters occurs.

Second, the function of stock index futures

Stock index futures refers to the transaction of standardized contracts with a certain stock price index as the subject matter, which is concluded by both parties and agreed to settle the stock price index at a certain time in the future. The functions of stock index futures are mainly manifested in the following aspects:

(A) to avoid systemic risks

The risk of stock market can be divided into systematic risk and unsystematic risk. Non-systematic risks can be dispersed and offset by stock portfolio, while systematic risks in the whole market cannot be avoided by portfolio. In particular, China stock market is immature, and systemic risk accounts for a high proportion of all risks. Therefore, it is urgent to hedge the stock index futures with the stock positions held, so as to eliminate the systemic risks in the stock market and maintain a stable rate of return.

(2) Price discovery function

Due to the frequent trading of stock index futures contracts, high market liquidity, low transaction cost and small bid-ask spread, the value of instantaneous information will soon be reflected in futures prices. On the whole, stock index futures are closer to an efficient market with perfect competition than stock spot, and the change of stock index futures price is often ahead of the change of stock price, which indicates the development trend of stock price. When the price of stock index futures deviates from the stock price, or the price of stock index futures with different maturities deviates, investors can calculate the degree of mispricing and hedge the low-risk income under the condition of locking the price difference. A large number of arbitrage transactions will quickly correct the wrong pricing in the market, thus making stock index futures have the function of price discovery.

(3) Improve the efficiency of capital utilization and reduce transaction costs.

The two-way trading mechanism of stock index futures enables institutional investors to trade whether the stock price rises or falls, so as to avoid idle funds when the stock price falls; The leverage effect of stock index futures can improve the efficiency of capital use and reduce transaction costs; Due to the high liquidity of stock index futures, it is much simpler and faster to establish a corresponding number of positions in the stock index futures market than in the stock market, and it can avoid the large fluctuation of stock prices caused by the large amount of funds entering and leaving, and increase the execution cost of transactions.

(D) securities investment, diversification of investment risks

Foreign institutional investors usually make an effective portfolio among stocks, bonds and futures to spread risks and improve investment returns. In the international financial market, stock index futures are often used as an important tool for funds to construct indexed portfolios. With the help of the combination of stock index futures contracts and long positions of government bonds, the fund can bind the stock price index and obtain the same rate of return as the stock price index. Empirical analysis shows that adding some futures to the original stock and bond portfolio can effectively reduce the risk at the same expected rate of return.

Thirdly, the role of stock index futures in the risk management of open-end funds in China.

The essence of stock index futures trading is the process that investors transfer their expected risk of the whole stock market price index to the futures market. In the risk management of open-end funds, the main functions of stock index futures are as follows:

(A) to avoid the systemic risk of open-end funds

The ideal operating environment of open-end funds is the securities market with large scale, strong liquidity, high maturity and rational investors. China's securities market has developed less than 20 years, with strong speculation and frequent fluctuations, which brings huge systemic risks to open-end funds. In addition, there is no short-selling mechanism in China stock market, so fund managers cannot operate in reverse. Once entering a bear market, funds will face greater systemic risks. Stock index futures can be traded in both directions, which is an effective tool to avoid systemic risks. When the stock market rises to a certain extent and shows signs of turning around, or the fund manager wants to temporarily lock in the existing income, it is not necessary to sell stocks, as long as a certain number of futures contracts are sold in the stock index futures market. If the stock market really falls, its stock will lose money, but its stock index futures contract will make a profit. When the stock market decline is relatively stable, close the short position of stock index futures and compensate the stock loss with the short profit of stock index futures; Similarly, when the stock market decline will stop falling and turn up, open-end funds can first establish an appropriate number of positions in the stock index futures market, and then steadily choose stocks to buy in the stock market. At this time, even if the cost of buying stocks will increase, they can make up for it with the profits of multiple positions in stock index futures, and finally achieve the goal of opening positions at low cost. The above operation methods can make open-end funds effectively avoid systemic risks and maintain the stability of returns.

(2) Control liquidity risk and deal with redemption pressure.

The characteristics of free redemption of open-end funds require fund assets to maintain sufficient liquidity: sufficient cash flow to meet payment needs; Or ensure that assets are realized in time to make up for the lack of funds. However, liquidity and profitability are often the opposite. If fund managers only consider liquidity risk, ensure the safety of funds and reduce their rate of return, then open-end funds will still face the pressure of redemption. Liquidity and profitability are "dilemmas" faced by open-end fund managers, and fund managers' partiality to either side may lead to crisis. Stock index futures have played a unique role in alleviating this contradiction. In the face of redemption pressure, fund managers can sell futures contracts in the stock index futures market as a substitute for stock spot, and then close the short contracts of stock index futures after the stock spot is sold.

(c) Optimize the investment portfolio and improve the return on investment.

At present, China's investment funds are generally limited to the stock market, and the investment varieties are single. Stock index futures can enrich the investment varieties of open-end funds, thus optimizing the asset portfolio and improving the rate of return.

(4) Reduce transaction costs and improve the efficiency of capital utilization.

The two-way trading mechanism of stock index futures enables funds to be traded whether the stock price rises or falls, so as to avoid idle funds when the stock price falls; The high liquidity of stock index futures can avoid the influence of a large amount of capital inflow and outflow on the stock price; The leverage effect of stock index futures can improve the efficiency of capital use; It is much faster to establish corresponding positions in the stock index futures market than in the stock market.

(5) Connect with the international market and improve competitiveness.

As a financial innovation tool, stock index futures have been widely used in international capital investment. Especially after entering the1990s, with the rapid development of the global securities market, the international investment is increasingly extensive, and the demand of institutional investors for hedging instruments is soaring, which makes the number of stock index futures increase rapidly in the past 10 years and become the most dynamic financial instrument in the global financial derivatives market. If China's open-end funds can use various derivatives such as stock index futures, on the one hand, it can improve the efficiency of capital operation, on the other hand, it can also participate in the global derivatives market competition.

References:

[1] Wang Chunfeng: Risk Management in Financial Markets, Tianjin University Press, 200 1 Edition.

[2] Liu Wei: "Systematic Risks of Securities Investment Funds and the Development of Stock Index Futures", "Scientific and Technological Progress and Countermeasures", No.9, 2005.