The Arbitrage Strategy Of Structured Funds And Stock Index Futrures

Structured Funds are innovative products based on closed-end fundsdeveloped by the structured classification technique. Structured Funds havethe same operation mechanism with the General Funds, while they split itsreturn into low-risk shares and high-risk shares. In essence, high-riskshares loan from the low-risk shares to obtain investing in leverage. Thereason why high-risk shares are welcomed in secondary market and havehigh premium is that they serve for tools of leveraged investment whileleverage is rare in China’s finance market. However, stock index futuresalso have the function of leveraged investing and have lower financingcost and lower margin requirement. Based on the phenomenon above,this article structures arbitrage strategies between Structured Funds andstock index futures.The provisions of split-funds are closely reviewed first. The articlesorts the operation mechanism and trading rules, dividend policy, variousoptions of different split-funds and generalizes their characteristics.In the next place, this article analyzes the return feature of high-riskshares. A scenario analysis is conducted on return on high-risk shares inaccordance with growth rate of basis shares, in which fixed return oflow-risk shares and fees are taken into account. The result comes out thatmost high-risk shares would reach balance of profit and loss if growth rateof basis shares is higher than4%-5%. In the meanwhile, we take a deeperexamination into the reasons behind the premium phenomenon. Both theregression of panel data and regression of time series of each high-riskshare respectively tells that leverage ratio is a relevant factor on its high-risk share premium.Finally, based on the average-value-return trend of high-risk share’spremium, an arbitrage strategy is structured. When the difference ofpremium of high-risk shares and stock index future is higher thanthreshold value, buy stock index future and sell short high-risk shares.Even up the stock index future and return high-risk shares while itspremium returns to average value. The empirical results indicate that thestrategy is able to gain excess return.