Futures Traders Relying on Fundamentals Have Lost Billions

If Beijing CTA places more emphasis on policy orientation, and Shanghai quantitative CTA focuses more on price and volume signals, then Hangzhou CTA pays more attention to industry trends.

The low-profile and mysterious Hangzhou faction can be generally categorized into three types of capital: traders, the Yong'an group, and retail investors represented by Wang Xiaoan, Jiang Shibo, and Xu Wangguan.

Traders refer to leading domestic supply chain enterprises such as Materials Industry Group, Zhejiang Materials Industry Group, and Hotlink Group, along with chemical giants like Rongsheng Petrochemical and Hengyi Petrochemical. In the Qianjiang New City CBD, just within the three buildings of Pan Ocean International, Huafeng International, and Hanjia International, there are hundreds of commodity trading and related companies.

Zhejiang Materials Industry Group, Zhejiang Communications Investment Group, the parent company of Zheshang Zhongtuo, Hangzhou Industrial Group, the parent company of Hualian Group, Hengyi Petrochemical, and Rongsheng Petrochemical are all Fortune Global 500 companies. To hedge against price fluctuations, they have a significant demand for hedging in the futures market.

In the week of July 25th, the long-side investors believed that countering "involution" would boost the PPI, but some members of the Hangzhou faction, who were deeply attuned to the industry's temperature, were not convinced. However, the latter ultimately underestimated the power of policy and sentiment.

Many investors in the market, not just those from Hangzhou, can see that the current anti-involution and supply-side reforms are taking place in a completely different macroeconomic environment.

A leading futures research professional in Hangzhou told me that they do not understand the price increases of coking coal and soda ash. Because there are no specific implementation details available, although the market has surged significantly, they cannot analyze it based on their own research framework. In their view, the commodities have bottomed out, but the rapid rise is unreasonable. The economy is recovering moderately, and the current price increase is more driven by "improved inventory willingness" and speculative sentiment.

Emotional trading especially targets fundamentals; the more sensitive one is to industry changes and the deeper one researches fundamentals, the more likely one is to get hurt.

For instance, in the case of coking coal, most people notice the decline in coal mine inventory, but professional institutions find that the inventories at downstream coking plants and steel mills are rising, and the inventory of finished products at the very end is still accumulating. Inventory has shifted from upstream to mid-to-downstream for stockpiling, while actual demand is weak. Zhao Wei, the chief economist at Shenwan Macro, pointed out in the research report "The Paradox of Price Increases": In July, supply and demand were "counterintuitive," with overall production performing better than demand, and there was no substantial supply contraction as the market had expected.

After two consecutive weeks of losses in some of its products, Runzhou also pointed out that the latest PPI (-3.6%) has hit a new low since April 2021, indicating that boosting industrial product prices is a long-term challenge. Furthermore, against the backdrop of insufficient effective demand, countering the "involution" is also a "balancing act"—not only must the "governance of key industry capacities" be promoted, but it should also not affect reasonable output and effective demand.

However, the foresight and granularity in investment research might not necessarily translate into financial statements. The "anti-involution" movement acts like an adrenaline shot for the market, with each essay more vivid than the last, and the futures market becomes increasingly sensitive to any provocation.

Exaggeratingly, on August 6th, the open interest for coking coal was 863,000 contracts, which translates to more than 50 million tons of physical goods. The transaction volume in July alone reached 3 trillion yuan, which is twice as much as during the peak of coking coal prices in 2021.

The market controlled by short posts is something the Hangzhou faction involved in various industries is somewhat unaccustomed to.

In the week of July 25th, a futures analyst in Hangzhou expressed to the author the chaos in the market: "After everyone produced the supply-demand balance sheet, they didn't know what to do. Some took naked short positions, and some hedged, but hedging isn't necessarily better than naked shorts. After all, recently, it's just about picking the ones that have dropped the most to rise, without even looking at supply and demand anymore."

The extreme market condition of consecutive limit-ups has also left Hangzhou traders, who are closely connected to the industry, unable to escape unscathed.

In the first half of the year, the Nanhua Commodity Index fell steadily. A total of 384 listed companies issued announcements regarding commodity hedging, an increase of 10% year-on-year. Many industry giants are concerned about weak demand leading to inventory devaluation and are engaging in short hedging, including traders in Hangzhou.

Later, the anti-involution trend began to emerge, and the futures market started to become restless. Traders, sensing the risk, were concerned that prices might rise too quickly and be followed by a correction. To lock in profits, they engaged in a cash-and-carry arbitrage by buying physical goods while simultaneously selling futures.

However, later the futures continued to hit the daily limit up and experienced a sharp premium. If traders did not stock enough in the spot market and did not have time to supplement cash, their short positions could easily be forced to close, resulting in significant losses.

Therefore, whether it is futures asset management in Hangzhou or traders, this round of market trend has been very challenging.

Last week, a subjective futures fund manager in Hangzhou told me, "Initially, when mentioning anti-involution, the industry basically didn't believe it. But last week, the surge was so strong that we, like Honghu, turned bullish. However, starting from Friday's night session, negative feedback began. We expected a pullback, but didn't anticipate a massive drop to the limit down, which wiped out our profits from Thursday and Friday, leaving us with a loss."

Even the prominent retail investor who thrived in this round of anti-involution market—“Yu,” who started with a capital of 22 million and at one point had unrealized gains approaching 300 million, withdrew 70 million at the high point on July 28. Ultimately, due to a decline in the stock, they were forced to cut their position, and their net profit retraced to 72 million.

Players who understand the industry better base their judgments more on the dimensions of facts and data, but the "anti-involution" trade unfolds on the third dimension of emotions and the fourth dimension of dreams. As the most frenzied stage of trading has concluded, whether the expectation of demand improvement can become a reality will be the key to the upcoming long-short battle.

Note: The original title is "The Hangzhou Gang Suppressed by Small Essays," and the content has been excerpted.