Gao Renyuan, founder and chief investment officer of Westfield investment, gave a speech in the field of hedge funds. First, he expounded the development of hedge funds in recent years, and then he thought about the current situation of the global market, paying special attention to the risk that the central bank will shrink its table significantly from next year. Finally, he shared his strategy and several trading examples.
The following is the content of the speech:
Dear leaders and friends, good morning!
I am very happy to come to beautiful Dalian today and participate in such a professional exchange activity. After leaving the seller's office on Wall Street two years ago, I started a hedge fund. Today, I mainly talk about industry trends, views on the current market and profit strategies of hedge funds from the perspective of a hedge fund practitioner.
We first have a general understanding of the hedge fund industry, then look at the scale trends of different segments, and finally compare the average performance of different investment strategies in the past few years. This statistic is the total annual scale of the global hedge fund industry in the past five years, which has increased from 65,438+0.8 trillion in 2065,438+02 to 3.2 trillion dollars today, and the overall growth is stable. The following set of data is the scale change of different hedge fund strategies in the past five years. We can see special events, such as the slow decline of stock long-short strategy scale and the relatively rapid listing of market neutral strategy scale. This situation shows that investors are cautious about the current market valuation level.
So what is the overall performance of hedge funds? Let's look at the average income of different strategies in the past five years. This data shows that the average performance and different investment strategies of thousands of hedge funds around the world are still very different. The macro-strategy performance is relatively poor, and the five-year total report is close to zero. Market-neutral strategy suffered less impact during the global market correction of 20 16, but its overall income was not as good as other strategies with high market correlation.
Let me talk about the current global market situation from the perspective of market participants.
The first chart shows the credit spread of American high-yield corporate bonds in the past 30 years. This is an important indicator for the market to price risky assets. We can see that the current risk spread is 3. 15%. It reached 10% or more in the previous three times. The first time was the leveraged M&A bubble in the early 1990s, the second time was the Internet bubble after 2000, and the third time was the most serious one so far, which was the financial crisis triggered by subprime mortgage in 2008. We can see that the current credit spread is less than 1% from the historical low of about 2.5%. The second picture shows the ratio of global average corporate valuation to corporate cash flow. This ratio is now 12 times, and it has reached an all-time high. The third chart shows the yield of US 10-year treasury bonds. In the past 55 years, after reaching the peak of 16% in the early 1980s, it has been declining all the way, and now it is about 2.3%, which is close to the lowest point in history. The fourth picture shows the basic interest rate and inflation rate in the United States. As we all know, the basic interest rate in the United States fell to zero after the financial crisis in 2008, and it remained at zero interest rate for seven years. In recent years, it has just begun to enter the ascending channel. The inflation rate is still at a low level, and now it is around 1.9%. In a word, all indicators show that the rate of return on global assets is at a very low level, while asset valuation is on the contrary, at a very high level.
What is the fundamental reason behind this high asset valuation? I think it is caused by the huge amount of liquidity injected into the market by global central banks. In the past decade, the Fed's balance sheet has expanded from $65,438+0 trillion to $4 trillion. Central banks around the world, from 5 trillion to 20 trillion dollars. The huge expansion of the central bank's balance sheet is generally achieved by buying bonds in the market, which is also called quantitative easing.
This direct impact is the bond market. This chart shows that $8 trillion of the total global bond stock of $48 trillion is negative. Accounting for 18%. Negative income is a very strange phenomenon, which is equivalent to lending money to others without interest, and creditors have to pay back the money. This shows that the market is distorted.
Let's look at the stock market again. This picture shows the simultaneous expansion of the US Standard & Poor's 500 Index and the Fed's balance sheet after the Fed began to expand its table in 2009.
Then the problem is coming. Since the fourth quarter of this year, the Federal Reserve began to reduce its balance sheet, and now it is expected to accelerate in the third and fourth quarters of 2065438+2008. According to the annual rate of 500 billion dollars, the bond assets on the Fed's balance sheet will be reduced to about 2 trillion dollars in about four years. So who will take over this $2 trillion asset? Personally, I think that the shrinking table will be a very big uncertain factor in the market next year.
The receiver is of course the buyer's investment institution in the end. At this turning point, middlemen often need to supply short-term liquidity to the market. These intermediaries are market makers on Wall Street, including my former employer, Goldman Sachs Group. Under the supervision framework of Basel III, which was implemented in 2008, the field of market makers has undergone earth-shaking changes. One of the most significant changes is the sharp contraction of market maker positions. Taking corporate bonds as an example, the statistics of Deutsche Bank show that the positions of market makers have decreased by an average of seven times. The stock market has more than tripled. Multiplied by the two factors, the liquidity gap is as high as 14 times.
So what impact will the huge liquidity shock bring in the future? I think the impact will be all-round. The first direct impact is the bond market. The yield of national debt will rise from the lowest level in history, risky assets will be revalued, and the credit spread will expand. The volatility of the market will also rise sharply from the current historical low.
Another important impact of raising interest rates is the inflation rate. The unprecedented expansion of global liquidity in the past eight years has not increased the inflation rate. Why does rising interest rates lead to rising inflation? This is because the mechanism of low inflation is different from the past. In the past, inflation was caused by liquidity reaching the consumption end, and this time it was liquidity expansion. During 2009-20 16, global liquidity expansion basically reached the supply side. There are many reasons for this, such as the intensification of polarization between the rich and the poor in the world, the compression of production costs by economic globalization and scientific and technological progress, and so on. But in short, the transmission mechanism is very clear: a large amount of liquidity pours into the stock market, bond market and PE/VC field, pushing up the asset value, and at the same time causing overcapacity and productivity improvement brought by scientific and technological progress. This is why a large number of technology unicorn companies have emerged in recent years-many of them have high valuations, but their profits are still negative. This is also the financial driving force behind the American shale oil and gas industry revolution. Now the problem is coming. In the case of tight liquidity, this process will be reversed: the power of asset expansion will be weakened-"capital investment will slow down"-"capacity growth will slow down"-the situation of oversupply will be reversed and inflation will intensify.
In addition, this process will also impact the interest rate curve and make the yield curve steep. At present, the basis difference between 2-year USD swap and 10-year interest swap is about 50 basis points, which is likely to rise to more than 2% in the future.
So, as a hedge fund practitioner, how can we make a profit in the turbulent market? Compared with the traditional asset management field, hedge funds are characterized by flexibility and diversity of strategies. For example, a good strategy can also make a profit in the process of market decline. In addition, the turbulent market provides more trading opportunities for flexible hedge funds. I will briefly introduce several hedge fund strategies and several examples of actual transactions.
Carry strategy has different performances in different fields. The basic idea is to realize the continuous accumulation of small profits by taking and managing tail-end risks. Trend strategy is to use the inertia characteristics of the market to track the trend in order to achieve the purpose of buying low and selling high. Median regression strategy is to predict the future trajectory of the market by looking for risk factors with a fixed range of change.
The figure shows the real-time analysis and monitoring of trading signals through the median regression strategy. When the relevant risk factors deviate from the median, the computer program will automatically identify the time points of buying and selling to run the transaction.
Fundamental strategy is another powerful and widely used strategy. Different asset classes have specific analytical frameworks. Due to time constraints, I won't introduce them one by one.
Let's focus on an example of a commodity market and discuss it with experts in the commodity field here. Of course, the most concerned and dramatic thing in the global commodity market is oil price. In the past few decades, it was determined by the situation in the Middle East and the Organization of Petroleum Exporting Countries. Things began to change around 2009, which is the so-called shale oil revolution in the United States. As can be seen from the picture on the left, the oil price is completely determined by the global balance of supply and demand. During 2004- 12, the supply shortage was about 100 to 2 million barrels per day, accounting for 1-2% of the total daily supply and demand. This shortage of 1-2% pushed the oil price up to more than $0/00 per barrel. High oil prices and low financing costs have promoted the rapid development of shale oil industry in the United States. The picture on the right shows that American oil production has doubled in the past seven years. This growth has largely caused the global oil surplus since 14. This caused the oil price to plummet from 15 to 16. By 65438+February 2006, WTI had fallen below $30, far below the production cost of shale oil in the United States. It forces shale oil miners to significantly reduce capital expenditure and achieve the effect of passive production reduction. At the same time, the oil-producing countries of the Organization of Petroleum Exporting Countries also took the initiative to reduce production, and the supply and demand reversed in 16. Oil prices bottomed out and rebounded.
An important indicator of supply and demand balance is inventory. We can predict the trend of oil prices next year through the trend of inventory changes. In the figure, the red line represents the five-year average inventory of the United States, the yellow line represents the current inventory trend, and the blue area represents the extent to which the inventory exceeds the average level. It can be seen that the huge increase in inventory during 20 15- 16 led to a panic decline in the market. Since 20 16, supply and demand have returned to the equilibrium point, and the inventory has declined rapidly. If the current destocking trend continues, US crude oil inventories will be below average in the first half of next year. If so, the oil price will return to the sustainable price above 70.
Let's talk about cross-asset strategy first. Market participants of different kinds of assets are often different, and their responses to information and risk assessment are often different. Run long and short transactions and relative value transactions between related asset categories across assets.
The following is a transaction example. Because the theme of today's meeting is commodities and derivatives, I still use an oil-related trading example. This example uses the correlation between the bond prices of oil exploration companies and the prices of oil commodities to hedge and arbitrage risks. The specific method is to do more bonds and short oil commodity ETFs at the same time. The price fluctuations of the two can basically be hedged. Bonds are profitable because of debt interest, and oil futures are profitable because of the near-end futures curve. In this way, we can hedge the oil price risk and make profits at both ends of the bull and bear.
To sum up, today I want to share three aspects with you. First, global hedge funds have been relatively stable in recent years. The second is my personal thinking about the current situation of the global market, focusing on the possible market risks next year. The third part introduces the hedge fund strategy and several trading examples.