In the ever-changing Cryptocurrency market, quantitative Arbitrage strategies, with their stability and risk control, have gradually become the wealth code favored by investors. In this webinar, Pacific Droplet invited Allen and Leon, two partners from Hashflow Asset Management, with Xiaozhou, Executive Director of Taibao Asset Management Hong Kong, as the host, to discuss the core logic and market potential of this strategy with everyone.

Guest Introduction

· **Allen：**TradFi background, once deeply involved in stocks, futures and other fields, switched to the Cryptocurrency market in 2018, leading the introduction of traditional market quantitative models into encryption trading, with over six years of experience in digital asset quantitative trading. The encryption asset quantitative team led by him successfully avoided crises twice in the 312 crisis in 2020 and the FTX thunderstorm in 2022.

· **Leon：**With years of Hedging fund and Risk Management experience, he has worked for Citibank and top domestic private sale. Since 2018, he has focused on quantitative Arbitrage strategies in the Cryptocurrency market.

· Host: Xiaozhou, currently serves as the Executive Director of Taibao Asset Management Hong Kong, with long-term focus on fixed income investment.

Wonderful Q&A Content

Opening: The Birth and Background of Quantitative Arbitrage Strategies

**Xiaozhou：**Allen and Leon, you were both senior practitioners in the TradFi field at the beginning. What prompted you to enter the cryptocurrency market and make quantitative Arbitrage your main focus?

Allen: "In TradFi, quantitative trading has been very mature, but with the entry into the Cryptocurrency market in 2018, we found that the market's volatility, the proportion of retail investors, and overall immaturity are very suitable for the application of quantitative strategies. The unique mechanisms of the Cryptocurrency market, such as Perptual Futures and funding rate, have also brought us brand new Arbitrage opportunities."

Leon: "At that time, we saw that many trading mechanisms in the crypto market were similar to traditional markets, but there was a huge opportunity for quantitative arbitrage due to low liquidity and inadequate professionalism of market participants. Combined with our team's strong experience in algorithmic trading, we quickly identified the opportunity."

Question 1: Please provide a detailed explanation of the operational logic and source of income for quantitative Arbitrage?

Allen： "The essence of quantitative Arbitrage is to profit from the price difference between Spot and Perptual Futures. We buy Spot and short Perptual Futures at the same time. Due to the fact that long positions holding Perptual Futures need to pay funding rate, this cost eventually becomes the income source for the arbitrageur."

Leon: "The core advantage of this strategy is that through Hedging of Spot and contracts, we can achieve market neutrality, and the portfolio will not be affected by price Fluctuation, regardless of whether the market is pumping or falling."

Summary Points:

· funding rate: Settlement every 8 hours, with an annualized return of 20%-30% in a bull market and still maintaining 8%-10% in a bear market.

· Risk Neutral: Hedging of spot and contracts ensures stable returns and avoids market fluctuations.

Question 2: How does quantified Arbitrage ensure long-term stability in the face of market volatility and complex operations?

Allen："We use a unified Margin account to integrate the fund management of Spot and contract, avoiding the fund risk of cross-account operation. At the same time, we provide basic guarantee through the DepthLiquidity of blue-chip coins (such as BTC, ETH)."

Leon: "In addition, our dynamic rotation mechanism is another key point. We monitor the funding rate of all mainstream currencies every day, adjust the portfolio based on returns and risks, and ensure maximum returns and minimal risks."

Summary Points:

· Unified Margin account: Simplify fund flow and reduce Settlement risk.

· Dynamic Rotation: Real-time adjustment of configuration to optimize returns and risks.

Question 3: How do you deal with potential risks if the market price difference suddenly widens or the funding rate becomes negative?

Allen: "When the spread widens, we will reduce position or reconfigure according to the real-time monitored pullback data. In addition, the DepthLiquidity of blue-chip coins ensures that the spread can quickly return."

Leon: "As for the negative funding rate, we have set up strict stop loss mechanisms. If the funding rate of a certain currency is negative for 5 consecutive days, we will remove it from the portfolio."

Summary Points:

· Risk Management: reduce position, adjust allocation, or drop leverage.

· Stop loss mechanism: Adjust the strategy when the negative funding rate exceeds 5 days.

Question 4: For some investors, holding BTC directly may be more attractive. So why choose quantitative Arbitrage?

Leon: "The direct profit from holding coins depends entirely on market price fluctuations, which is very risky. Quantitative arbitrage provides a low-risk, stable return option. For risk-averse investors, this balance is even more important."

Allen："For portfolio management, we also recommend combining holding coins with quantitative Arbitrage to enhance returns. Holding coins captures pump opportunities, while Arbitrage strategies mitigate Fluctuation risks."

Summary Points:

** · Low risk stability: **Suitable for risk-averse investors.

· Portfolio Advantage: Combining holding coins with Arbitrage enhances returns.

Question 5: How long can the Bull Market in the encryption market last? How long can the high-yield phase of the Arbitrage strategy be maintained?

Allen: "Based on historical cycles, the cryptocurrency market experiences a halving approximately every four years. We expect that the high-yield phase of the bull market may continue for the next 6 months, until the market enters the early stage of the bear market."

Leon: "Even in a Bear Market, quantitative Arbitrage remains a preferred strategy. Through refined management and diversified asset allocation, we can continue to maintain low drawdowns and stable returns."

Summary Points:

· Bull Market Phase: The high-yield period is expected to last for 6 months.

· Bear Market Advantages: Small strategy drawdown, still able to provide steady returns.

Question 6: Many viewers are interested in the specific operation of quantitative Arbitrage, such as the actual operation process if they have 1 million US dollars.

Allen："We will use Spot and Perptual Futures for Arbitrage. For example, 1 million US dollars can be used to buy 2 million US dollars of Spot, while shorting an equivalent amount of Perptual Futures. This will involve moderate leverage, generally controlled within two times. This operation ensures that the income comes from the funding rate, not the market Fluctuation."

Leon: "In addition, the current trading platform supports a unified Margin account, which greatly simplifies the operation process. In the past, we had to constantly transfer positions between Spot accounts and contract accounts, but now all operations can be completed within the same account, reducing fund transfer risks and improving efficiency."

Summary Points:

· Leverage Control: Amplify profits moderately while dropping risks.

· Unified account: Simplify operation process and reduce financial risk.

Question 7: Quantitative Arbitrage seems to have a low drawdown, but there is still risk. Can you explain in detail what potential risks there are and how to manage these risks?

Allen: "The main risks include:

· Spread Fluctuation: The spread may widen in the short term when building a position, resulting in floating losses.

· Negative funding rate: Although the funding rate is mostly positive in the long run, it may also turn negative in the short term.

To deal with these risks, we have established strict stop loss rules. If the funding rate of a certain currency is negative for 5 consecutive days, it will be removed from the portfolio. In addition, through diversified currency allocation, we have mitigated the impact of individual currency fluctuations.

Leon: "The recovery of the pullback mainly depends on two points:

· Price Convergence: Market spreads will eventually return to normal ranges.

· Funding Rate Recovery: Long-term positive returns will gradually offset short-term negative returns."

Summary Points:

· Fluctuation and negative funding rate: The main source of risk, but effectively controlled through multi-currency configuration and strict stop loss.

· Drawdown Recovery Mechanism: Implemented by relying on price spread regression and fund fee restoration.

Question 8: In extreme market conditions, such as sudden large Fluctuation in prices, how should quantitative Arbitrage respond?

Leon： "We have taken a variety of response measures:

· Diversified Position: The allocation ratio of a single currency will not exceed 5%.

· Dynamic Rebalancing: When the price difference widens, reduce position to drop the risk. If it is determined that the price difference is already at its limit, Reverse increase the position to capture profits."

Allen："The team's technology and process are also crucial. For example, during the 312 incident (March 12, 2020), many trading platforms crashed, but our system was able to send out alerts for the first time and quickly increase the position after the system recovered, ultimately making a profit."

Summary Points:

· Diversified allocation: drop single currency risk.

· Technical Support: Respond to extreme events through alarm and rapid response systems.

Question 9: What are the differences in the performance of quantitative Arbitrage in Bull Market and Bear Market? Is there a significant difference in return rates?

Allen: "In a bull run, the funding rate is usually high, and the arbitrage profit is typically between 20% to 30% on an annualized basis. In a bear market, the funding rate drops, and the annualized profit is around 8% to 10%. Even if the market enters a bear market, the arbitrage strategy can still provide stable returns because the risk and fluctuation have been hedged."

Leon: "In the Bear Market, we will pay more attention to the rotation of funding rate and select the best currencies to maximize profits. For example, in the past Bear Market, we optimized the coin allocation to keep the overall drawdown within 0.6%."

Summary Points:

· Bull Market Returns: Up to 30%.

· Bear Market Returns: Approximately 8%-10%, with extremely low risk.

Question 10: I understand that the quantitative Arbitrage strategy is somewhat like the cash management enhancement tool in TradFi. Is it more suitable to switch from traditional bonds or money market funds to this strategy, rather than directly participating in high-risk assets?

Allen: "Your understanding is very accurate! The characteristic of quantitative arbitrage strategy is stable and low risk. It is more like an upgraded version of cash management tool. Compared with bonds or money market funds, our annualized return is higher, while the risk is maintained at an extremely low level."

Leon: "Indeed. Quantitative Arbitrage is a very ideal choice for the stable portion of asset allocation. Especially for institutional investors or high-net-worth clients, traditional cash management tools have low returns in the current interest rate environment, while our strategy can achieve significant enhancement."

Summary Points:

· Cash Management Tool Upgrade: Higher returns, extremely low risk.

· Asset Allocation Recommendation: Suitable for investors switching from bonds or money market funds.

Question 11: If Spot price keeps pumping, and we short Perptual Futures, will the high funding rate lead to profit loss?

Allen: "This is a good question. In the unified account, the profit and loss of Spot and Perptual Futures are calculated comprehensively. Even if the funding rate rises, our income still mainly comes from the fluctuation of price difference and the positive income of the funding rate. In addition, our system will automatically adjust the margin to ensure the stability of the overall position and avoid unilateral risks."

Leon: "The advantage of a unified account structure is that it allows for the unified management of assets in both spot and contract trading, reducing the complexity of fund flow and margin replenishment, while ensuring the stability of the overall strategy."

Summary Points:

· Unified account: Comprehensive calculation of profit and loss to ensure overall income.

· funding rate risk controllable: The main source of income comes from the price difference and positive rates.

Question 12: In extreme market environments, such as the 3.12 incident in 2020, how does quantitative Arbitrage respond?

Leon: 'In extreme events like 3.12, we will drop positions immediately to ensure risk control. At the same time, our technical system will quickly alert us to help adjust our strategy. In addition, we focus on blue-chip currencies with high trading depth and good liquidity, such as BTC and ETH, to avoid losses due to insufficient liquidity of small currencies.'

Allen："This extreme Fluctuation could also be an opportunity for us. For example, after the market recovered, we achieved excess returns by quickly increasing the position to capture spread income. Extreme market Fluctuation is both a challenge and an opportunity for us."

Summary Points:

· Risk Control: Timely reduce position and focus on blue-chip currencies.

· Technical Support: Alarm system and fast adjustment mechanism.

The above is the complete content of this seminar, inviting you to continue to follow the Pacific Droplet Network Seminar.