Amid a market situation of "rising index, but not rising individual stocks," quant index enhancement and market neutral strategies both came under pressure last week.

Data from third-party channels show that leading billion-scale quant private funds' CSI 500 and 1000 index enhancement products generally underperformed the indices; market neutral strategies suffered a double blow from alpha decay and rising hedging costs, with funds like Longqi falling over 2% during the week, marking their largest weekly decline this year.

Regarding index enhancement, the CSI 500 rose 3.88% last trading week (8.11-8.15), and the CSI 1000 rose 4.09% during the same period. However, many top managers' corresponding index enhancement funds underperformed their benchmarks, including Kuande, Jiukun, Xiaoyong, Tianyan, etc. For example, Huafang's CSI 500 fund rose around 2.4% for the week, and its CSI 1000 fund rose around 2.5%, both significantly underperforming the indices themselves.

Index enhancement funds still had the cushion of the index's significant rise, merely suffering negative alpha, but market neutral strategies, which pursue absolute returns, generally saw their net asset values (NAV) decline last week.

Neutral strategy private funds from several managers like Lei'ang, Longqi, and Lushensheng fell over 2% during the week, marking their largest weekly decline this year, exceeding the drop caused by the tariff black swan event in the week of April 7th. Market neutral strategies once again exhibited a "bull market disaster" trend where the broad market rises but the NAV falls.

Regarding the collective negative alpha of quant strategies this round, relevant personnel from quant private fund Lushensheng explained there are two reasons:

1. Weak alpha environment. Last week, the overall market indices saw considerable gains, but micro-level style shifts were unfavorable for mid-frequency strategies like theirs. Specifically, short-cycle, price-volume driven signals dominated the market movement, which favors high-frequency managers more. The environment was weaker for mid-frequency and mid-low-frequency models that rely on trend continuation and have longer holding periods.

2. Unfavorable style factors. Last week, the indices rose significantly, but the median stock gain in the market was only 0.53%. This means the index gains were pulled up by a minority of heavyweight stocks, indicating capital concentration in specific market cap and non-linear market cap related sectors. The main style factor exposures of quant portfolios misaligned with market preferences, causing a temporary drag on portfolio performance.

Quant market neutral strategies suffered a double whammy. Besides decay in the long side's alpha, hedging costs increased due to basis convergence. With one rising and the other falling, managers generally experienced negative alpha.

Lei'ang Investment explained that changes in basis also adversely affected product returns. Last week, the basis (discount) of the target main contract (IM2509) used for hedging in their neutral products converged by over 1% within the week, directly causing an additional 1% drawdown in the product's NAV.
According to industry feedback, the performance of neutral strategies varied among managers this time, with differences mainly on the long stock selection side. There were also differences in basis costs. For the same delivery date, the convergence magnitude was greater for IM (CSI 1000 index futures) than for IF (CSI 300 index futures) and IC (CSI 500 index futures). Neutral strategy NAV drawdowns might be larger if the short exposure to IM was significant.

However, multiple managers stated that this rapid basis convergence also lowered hedging costs for the future, and now might be a good time to介入 (enter/intervene in) neutral strategies.

Lei'ang Investment stated that taking their neutrally shorted IM2509 contract as an example, with a delivery date of 2025.09.19, after this convergence, the basis cost for the next five weeks is 0.4%, whereas the monthly basis cost was generally 1.2%-1.5% before. The significant drop in basis cost means the difficulty of NAV recovery is markedly reduced. Currently, the basis discount for forward contracts (IM2510/IM2512) has also decreased significantly. As long as there is no major market fluctuation during the next roll period (within these five weeks before September 19th), the overall basis environment will be very favorable for the recovery of neutral strategies.

The market neutral strategy involves, on one hand, quantitative stock selection to create a basket of stocks with expected alpha as the long position, and on the other hand, shorting stock index futures as the short position, simultaneously constructing long and short portfolios to hedge against market systemic risk. In principle, the long and short positions offset each other, allowing the neutral strategy to achieve absolute returns.

However, reality is not as smooth as in principle, especially after experiencing two rounds of extreme market conditions in 2024, which broke the "quasi-fixed income" perception of neutral strategies. First was the small-micro cap stampede in February 2024, second was the "bull market disaster" after the September 24th行情 (market event), where neutral strategies generally saw drawdowns of around 10%, leading the industry to re-examine the positioning of neutral strategies.

"We have always tried to avoid defining neutral strategies as 'low volatility' products. The essence of market neutral products is to hedge systemic risk in the stock market by paying a certain basis cost, thereby obtaining purer Alpha returns. Therefore, volatility on the basis side will also impact the product's NAV to some extent," Century Frontier stated in an interview, noting that neutral strategy does not equal low volatility.

In response, more managers are packaging neutral strategies with even lower volatility products into new asset solutions. Century Frontier introduced that in recent years, the company pioneered a flexible hedging strategy. This strategy line is based on market neutrality and uses a dividend优选 (preference/selection) strategy as one of the basis management tools. Its core lies in adjusting the allocation ratio between market neutral and dividend strategies based on key market indicators (mainly the basis level of stock index futures), aiming to capture return opportunities in different market environments while controlling risk.