In Quantitative Investment-Strategy and Technology, the trading modes of hedge funds are classified into four categories, namely, stock index futures hedging, commodity futures hedging, statistical hedging and option hedging.
Stock index futures
Hedging of stock index futures refers to the behavior of taking advantage of the unreasonable price of stock index futures market, participating in the trading of stock index futures and stock spot market at the same time, or trading stock index contracts with different maturities and different (but similar) categories at the same time to earn the difference. Arbitrage of stock index futures can be divided into cash hedging, intertemporal hedging, cross-market hedging and cross-variety hedging.
Commodity futures
Similar to the hedging of stock index futures, commodity futures also have hedging strategies. When buying or selling a futures contract, they sell or buy another related contract and close both contracts at a certain time. It is similar to hedging in transaction form, but hedging is to buy (or sell) physical objects in the spot market and sell (or buy) futures contracts in the futures market; Arbitrage only buys and sells contracts in the futures market, and does not involve spot trading. Commodity futures arbitrage mainly includes cash hedging, intertemporal hedging, cross-market arbitrage and cross-variety arbitrage.
Statistical hedging
Different from risk-free hedging, statistical hedging is a kind of risk arbitrage by using the historical statistical law of securities prices, and its risk lies in whether this historical statistical law will continue to exist in the future.
The main idea of statistical hedging is to find out several pairs of investment varieties (stocks or futures, etc.). ) has the best correlation, and then find out the long-term equilibrium relationship (cointegration relationship) of each pair of investment varieties. When the price difference (residual of cointegration equation) of a pair of varieties deviates to a certain extent, they start to open positions-buying relatively undervalued varieties, shorting relatively overvalued varieties, and taking profits when the price difference returns to equilibrium. The main contents of statistical hedging include stock matching transaction, stock index hedging, securities lending hedging and foreign exchange hedging transaction.
Option hedging
Option, also known as option, is a derivative financial instrument based on futures. The essence of option is to price the rights and obligations in the financial field separately, so that the transferee of the right can exercise his right to trade or not to trade within a specified time, and the obligor must perform it. When trading options, the buyer is called the buyer and the seller is called the seller. The buyer is the transferee of the right, and the seller is the obligor who must fulfill the buyer's right.
The advantage of options is that the expected annualized expected return is infinite and the risk loss is limited. Therefore, in many cases, using options instead of futures for short-selling and hedging transactions will be less risky than simply using futures arbitrage, and the expected annualized expected return will be higher.