Graded fund, also known as structured fund, this is currently the most concerned in the market, the hottest fund products, this kind of fund has both high risk and high return and low risk and stable return characteristics, is really a fund product worthy of everyone's close attention.

So, what exactly is a tiered fund? What is the difference between it and an ordinary open-end fund?

First of all, a graded fund is not actually a fund, but a combination of two funds, one of which is called Fund A and the other is called Fund B

The origin of the name hierarchical fund is that it is named because a fund is split into two funds with completely different attribute levels.

The basic principle of the operation of a hierarchical fund, we can give an example to explain:

Mr. A has 100,000 yuan in his hands, he is a risk aversion, and he wants to have a way to invest with low risk and high interest. For example, national debt.

Mr. B also has 100,000 yuan in his hands, he is a risk lover, and he hopes to make more money in the stock market when the stock market is bullish.

Mr. B wants to make a lot of money in the stock market, but his principal is limited, and even if he is very optimistic about the future market, he cannot increase his profits.

The easiest way to increase profits is to use limited funds to increase leverage, such as stock index futures, such as margin trading, but unfortunately, stock index futures and margin trading have an account opening threshold, and at least 500,000 yuan is required to be eligible to play, but Mr. B does not have that much money.

So Mr. B thought of asking Mr. A to borrow money, and agreed to pay Mr. A 5% interest every year.

In this way, Mr. B took his 100,000 yuan principal and Mr. A lent him 100,000 yuan and invested them in the stock market. It is equivalent to having double the leverage, and no matter how the stock market rises or falls in the future, his gains and losses will be doubled. In addition, he needs to pay Mr. A $5,000 a year in interest.

As for Mr. A, he doesn't have to do anything, he just has to wait for the 5% interest per year.

A here is a graded fund A, and B is, of course, a graded B.

In fact, we can think of Grade A as a fund similar to a bond type, while Grade B is an ETF fund with double the leverage of the price increase.

The so-called ETF fund is an index fund that can be directly traded in the secondary market, and the same is true for grade B, the usual grade B fund always has a target sector, such as ChiNext B, high-speed rail B, and the Belt and Road B, and you can see from the name what industry sector they are tracking.

Now that we know what a tiered fund is, how is the price and value of a tiered fund calculated?

Anyone who has bought a fund knows a basic concept, a fund that can be traded in the secondary market, its net value and market price are not the same, which is a bit like stock index futures.

The price of stock index futures is generally always different from the underlying index, which is called contango and discount in futures terminology.

There is also this difference between the net value of the fund and the secondary market price.

Of course, before we study the spread of tiered funds, we must first know how the net value of the fund is calculated.

A graded fund is actually a combination of three funds, namely Grade A, Grade B, and Fund of Funds.

The parent fund is actually a combination of the two funds of AB, or AB is the doppelganger of the parent fund.

Grade A is a fixed interest, so his net worth is generally 1 yuan, or slightly more than 1 yuan with interest income.

The price change of the fund of funds is basically equivalent to the change in the price of the underlying security.

For example, if the net value of the parent fund of the GEM graded fund was 1 yuan yesterday, and the GEM index rose by 5% today, then the net value of the parent fund of the GEM graded fund today has become 1.05 yuan.

The net value of Grade B is calculated based on the net value of the Master Fund and Grade A, specifically:

(a+b)/2=FOF

When the net value of grade A is 1 and the net value of the parent fund is 1.05, the net value of grade B becomes 1.1 yuan.

Conversely, if the net value of the parent fund becomes $0.95, then the net value of grade B becomes $0.9.

Next, let's talk about secondary market prices.

There is a difference between the net value of a graded fund and its secondary market price. So how is this price determined?

The answer is market interest rates.

From the introduction just now, we can know that Grade A is actually equivalent to a perpetual bond. Since his nature is more similar to that of bonds, his yield should also be close to that of bonds.

For example, if the average annualized yield of long-term bonds in the market is 7%, will anyone buy a grade A with an annualized yield of only 5%?

Obviously not, and since it doesn't, the market price of grade A will fall until his yield is equal to 7%.

So where does the price of grade A fall to reach 7%?

Because the yield of grade A is a fixed 5%, the yield should reach 7%, and the market price = 1 * 5% / 7% = 0.714 yuan

And we know that there is a relationship between the price of grade A and grade B, (a+b)/2=fund of funds.

Assuming that the net value of the parent fund is $1, the secondary market price of grade B becomes $1.286.

At this time, the net value of grade B is actually only 1 yuan. There is a price difference of 0.286 yuan.

How did this price come about? This is related to the redemption rules of tiered funds.

Investors can combine one Tier A plus one Tier B into two Master Funds, and then redeem the cash according to the net value of the Parent Fund.

We know that the price of grade A is determined by the market interest rate, so it is basically a relatively stable value in the short to medium term, so that the price of grade B is determined.

For example, in the example above, once (Grade A price + Grade B price)/2 is less than the net value of the parent fund, then the investor can buy the same number of graded AB shares from the secondary market at the same time, and then turn it into the master fund and redeem it according to the net value and earn the difference.

Conversely, if (Grade A price + Grade B price)/2 is greater than the net value of the parent fund, then you can subscribe to the parent fund, and then split it into grade AB, and then sell it in the secondary market.

Of course, when you carry out arbitrage, you also need to take into account various fees and spread costs.

This is the basic principle of tiered fund arbitrage.

After talking about the pricing mechanism of tiered funds, let's talk about leverage.

The most fundamental reason why the graded fund shines in this round of bull market is that it is leveraged and does not have any purchase threshold.

Many people simply think that the leverage of grade B is 1x leverage, but this is actually a wrong idea.

When the net value of the parent fund of the graded fund is 1 yuan, the leverage of grade B is indeed 1 times, but when the net value of the parent fund changes, the leverage is also changing.

It is important to note here that this change in leverage is very different from ordinary leveraged financial products.

For general stocks, the more the stock price falls, because the principal is reduced, the less risk and loss everyone has.

For example, if you eat a down limit for 10,000 yuan, you will lose 1,000, and if you eat a down limit the next day, you will only lose 900, but this is not the case with grade B.

The lower the equity of Tier B, the higher the leverage and the faster it loses money.

The specific calculations are derived as follows:

(a+b)/2=FOF, the change in the net value of the FOF is equal to the change in the underlying security.

When the net value of grade B falls to 0.5 yuan, the net value of the parent fund is 0.75 yuan, the parent fund rises and falls by 1 point, B rises and falls by 2 points, the parent fund rises and falls by 1%, that is, 0.0075 yuan, and the grade B rises and falls by 0.015 yuan, 0.015/0.5/1% = 3 times leverage

When the net value of grade B falls to 0.25, the net value of the parent fund is 0.625 yuan, the parent fund rises and falls by 1% = 0.00625 yuan, and the corresponding grade B rises and falls by 0.0125 yuan, 0.0125/0.25/1% = 5 times leverage

In other words, if you buy when the net value of Grade B falls to $0.25, your assets will change by as much as 5% for every 1% rise or fall of the underlying sector index!

Because of this, Class B is actually a very high-risk security, and once the stock market falls sharply, investors will lose most of their assets in an instant.

On the other hand, careful readers should find that because (A+B)/2=FOF, when the net value of the FOF falls below 0.5 yuan, that is, when the underlying securities fall by more than 50%, the net value of Grade B becomes negative.

Then of course we will not let this happen, so we set a rule for the graded fund, when the net value of grade B falls below 0.25 yuan, a downward discount will occur, and the 4 funds will be merged into one, and the net value will change from 0.25 yuan to 1 yuan.

This is equivalent to a stock reduction.

At the same time, the share of Grade A will also be reduced to one-fourth of the original share, and the other three-quarters of the share will be converted into a fund of funds at the price of one dollar.

At present, there are many grade B prices in the market that are close to 0.25 yuan, and most of the prices of grade A are around 0.8~09 yuan, which is a huge risk-free arbitrage opportunity.

For example, the current market price of a grade A is 0.9 yuan, and you buy 10,000 copies of grade A at a cost of 9,000 yuan.

Then the next day, the decline of grade B triggers a downward discount, and the 10,000 copies of grade A in your hand are reduced to 2,500 copies of grade A, and there are 7,500 copies of the parent fund with a price of 1 yuan.

Next, you redeem the master fund and sell the remaining 2,500 graded A shares in the secondary market, regardless of the handling fee, and if the market price does not change, you will receive a total of $9,750, which is $750 more than when you first bought it.

When the price of grade A is lower than the price of $1, the higher the rate of return you can get, of course, provided that grade B triggers a net discount of $0.25.

Of course, this arbitrage method is not absolutely risk-free, on the one hand, you need to pay a lot of fees for this, and on the other hand, you must also beware of the possibility of grade B not falling below the discount.

Of course, the biggest risk comes from fluctuations in market prices.

According to the example above, when the discount is triggered by grade B, you will get 7,500 shares of the fund of funds with a net value of 1 yuan, but this fund of funds cannot be sold on the spot.

Whether you choose to sell in the secondary market or redeem directly, you need to wait for another day, and on this day, if the underlying sector falls sharply, such as a drop limit, then the net value of the parent fund is no longer 1 yuan but becomes 0.9 yuan, and at this time to redeem, you can only get 7500 * 0.9 = 6750 yuan, plus 2500 yuan of 2500 grade A, in fact, you have not earned a penny, and you may even have to lose some handling fees.

Therefore, how to carry out effective arbitrage depends on the discount of grade A and your judgment of the future of the market.

In today's turbulent plunge, a rating A may be the only security that is still safe and profitable, and it is worth everyone's effort to study.

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