What is the closing line of private equity funds? What is a fund explosion?
What is a fund short?
A short position is to redeem all a fund and get all the funds. Or someone redeems all the funds and has cash in his hand. Closing positions is easily confused with short positions. Please pay attention to the difference. Closing a position is buying and selling, or selling before buying. Specifically, for example, E Fund's value is redeemed today. After the redemption funds arrive, the redeemed funds are invested in the growth pioneer, which is equivalent to adjusting your fund holding portfolio, but the total amount of funds remains unchanged. If it is a bull, it is the closing of the subscription fund; If it is short, it is redemption fund liquidation.
Risks of empty warehouse operation:
First, lose the focus of investment. Since most stock market long and short funds have preset investment authorization, such as country/department/market value, any deviation is a warning signal.
Second, excessive use of leverage. Sometimes, fund managers may deviate from their normal total exposure by using leverage or derivatives.
Third, use derivatives. In some cases, fundamental investment managers who are not familiar with derivatives will use derivatives to realize their views on the market. This operation can be dangerous, especially when fund managers sell options to collect option fees. In turbulent times, funds may be hit hard, such as selling put options when the stock market is seriously consolidating due to systemic shocks.
Fourth, the portfolio is too concentrated. Some fund managers like to make full use of their insight into the company and build huge positions (such as 20%-30%) on a single stock. If these positions are small and medium-sized stocks, the scale of the fund is huge. In case of crisis, it is difficult for the fund manager to sell stocks to lighten up or raise funds to deal with redemption.
Fifth, it violates the stop-loss principle (unwilling to sell stocks). Usually fund managers will implement soft stop loss or hard stop loss. The soft stop loss of 10% means that after the stock market falls from the peak (or cost price) 10%, the fund manager must re-examine the position.
Sixth, the large scale of the fund is also a risk factor. Small-cap stock funds or single-country funds usually have a size limit, which depends on the liquidity of the underlying stock and the size of the investment team. After the fund reaches the largest scale, if it continues to absorb funds, expand to large-cap stocks or new countries, or invest in new stocks to form excessively diversified investments, it may not be able to replicate its previous success. If the fund manager claims to expand the fund scale, investors should be careful.
Seventh, liquidity mismatch. Most long/short funds in the stock market are allowed to be redeemed monthly or quarterly. For small-cap stock funds, in order to cope with redemption, the fund may be forced to withdraw from all positions within one month, thus being severely impacted by the market.
Eighth, currency hedging. Although most mutual funds are denominated in local currency or US dollars, and have formulated very strict currency hedging policies, most stock market long/short funds usually allow portfolio managers to determine their own currency hedging level.