Why Can't Quantitative Private Equity Escape the Vicious Cycle of Leverage and Homogenization? (AI Translation)

【周刊提前读】量化私募“踩踏” 为何走不出加杠杆与同质化怪圈？

The concentrated stampede by quantitative private equity funds on micro-cap stocks has thrust the deeply intertwined DMA (Direct Market Access) return swap business into the spotlight. On February 28, 2024, as the Shanghai Composite Index ended its eight-day winning streak with a 1.91% drop, China's Securities Regulatory Commission issued a late-night statement: it would continue to strengthen supervision and improve systems for OTC derivatives businesses like DMA, guiding the industry to properly control business volume and leverage.

In the A-share market, DMA is also known as long-short return swap, which has been widely used by quantitative private equity firms in recent years. These quantitative private equity firms sign return swap agreements with brokers qualified for such swaps using the accounts of the products they manage, and pay a fixed interest rate in exchange for the floating equity returns linked to stocks and futures targets.

This business model has evolved in the A-share market into private funds transferring their quantitative trading to the proprietary derivative hedge accounts of securities companies. At the same time, securities firms provide financing for quantitative private equity, with leverage of up to 4 times, and even claim that their trading systems can "directly connect to exchanges." Initially, DMA was mostly about quantitative private equity using its own funds plus leverage, but later on, an increasing number of quantitative private equities began issuing DMA products, allowing the funds raised from clients to also enter the market with added leverage.