Huabao Oil & Gas Arbitrage Surpasses Expectations (Including Its Investment Targets)

Today, the oil and gas sector experienced a broad rally. Market sentiment quickly heated up due to short-term events, causing international crude oil prices to surge significantly, which in turn boosted the entire oil and gas industry chain. Our previously tracked and gradually positioned Huabao Oil & Gas LOF (162411) also rose accordingly. So far, its intraday increase has reached about 7%. For me, who focuses on LOF arbitrage and seeks steady, reliable returns, this gain has fully met my expectations and even exceeded my initial profit estimates for this round of arbitrage.

While sharing my trades today, I also want to thoroughly explain the core investment logic and asset attributes of the Huabao Oil & Gas fund. This is the fundamental reason we can confidently engage in arbitrage and hold onto our gains. Many friends confuse Huabao Oil & Gas with pure crude oil funds, thinking that when crude oil prices soar, the fund should rise in tandem, even by the same magnitude. However, there are essential differences, which I repeatedly emphasize as key knowledge points.

Huabao Oil & Gas LOF is officially called Huabao S&P Oil & Gas Upstream Stock Index Securities Investment Fund (LOF). It does not directly track spot or futures crude oil prices but follows the S&P Oil & Gas Upstream Stock Index (SPSIOP). The index’s components are all upstream companies focused on oil and gas exploration, drilling, and production listed on major markets like the NYSE and NASDAQ. It does not involve downstream activities such as refining, chemicals, or oilfield services—this is its core asset positioning.

Regarding investment proportions, Huabao Oil & Gas adheres to strict compliance requirements: at least 80% of its net assets are invested in the constituent stocks and alternative stocks of the S&P Oil & Gas Upstream Index to ensure close tracking; it can also invest a small amount (up to 10%) in publicly offered funds or ETFs tracking the same index; and it maintains no less than 5% in cash or government bonds maturing within one year to handle redemptions and ensure liquidity. This structure makes it a pure equity index fund, not a commodity fund.

In terms of holdings, the fund uses a market-cap weighted approach, resulting in a very diversified portfolio. The top ten holdings account for only about 30%, including giants like ExxonMobil, Chevron, Occidental Petroleum, as well as numerous U.S. shale oil exploration and production companies. The limited impact of any single stock’s volatility allows the fund to reflect the overall health of the upstream oil and gas industry.

Because of this investment approach, the relationship between Huabao Oil & Gas and crude oil prices can be summarized as highly correlated but with a weaker upward movement than crude oil itself. Pure crude oil funds are directly linked to oil futures, with prices moving in sync with international oil prices. Huabao Oil & Gas invests in oil and gas company stocks, whose prices are influenced not only by crude oil prices but also by company earnings, U.S. stock market sentiment, industry policies, and exchange rates. Simply put, rising oil prices are the main driver boosting upstream companies’ profits and stock prices. However, the stock market anticipates these changes and can be affected by broader market fluctuations. Therefore, during short-term surges in oil prices, Huabao Oil & Gas’s gains are usually lower than crude oil itself. Today’s market performance perfectly confirms this logic—international crude oil prices rose significantly more than Huabao Oil & Gas, which is normal and consistent with product rules. We anticipated this scenario in advance, so there’s no need for unnecessary anxiety over the difference in gains.

On the market and operational level today, the core driver of Huabao Oil & Gas’s rise was geopolitical factors causing market sentiment fluctuations. Expectations for oil and gas supply temporarily shifted, leading to a rapid influx of capital into related sectors and pushing prices higher. On the previous trading day—last Friday—the U.S. upstream oil and gas sector showed little movement, and Huabao Oil & Gas’s net asset value did not increase noticeably. This indicates that today’s rally was mainly driven by sentiment and a premium increase, not a significant rise in net asset value. Even if Huabao Oil & Gas hit the daily limit up today, I have already achieved my profit target for this arbitrage round. The core of arbitrage is earning a reliable price difference, not betting on extreme market moves. Being content and locking in gains ensures the long-term stability of the arbitrage strategy.

Based on this judgment, I started gradually reducing my holdings and exiting the position as Huabao Oil & Gas’s intraday gain reached about 7%. So far, I have completely closed my positions in my personal account, and the third round of Huabao Oil & Gas arbitrage has officially concluded successfully. Some may ask why I didn’t wait for higher gains before selling. That’s the fundamental difference between arbitrage and speculation: arbitrage strategies have clear profit targets and risk control rules. We profit from convergence of premiums and discounts, sentiment, and net value deviations—not from betting on continued price surges. Short-term sentiment-driven rises are highly uncertain and can reverse quickly due to news or market changes. Lockting in gains early is the only way to ensure each arbitrage round is solidly realized.

Here, I must emphasize again: all my operations are based solely on my personal investment system, risk tolerance, and arbitrage strategy. They do not constitute any investment advice. Every investor’s capital, cost basis, risk capacity, and investment horizon are different. Everyone must make decisions according to their own situation. Do not blindly follow others’ actions. Independent judgment and responsibility for your funds are the most important principles in investing.

Longtime followers know that I have promised in videos and daily shares that I will inform everyone when I exit each arbitrage round. This is not only to record my investment journey but also to share my thinking with trusted friends. Today’s operation is a fulfillment of that promise. Investing is not only about earning returns but also about maintaining integrity and staying true to your original intentions. I will continue to share honestly and transparently, without exaggerating gains or hiding risks, growing steadily with everyone in the market.

This third round of Huabao Oil & Gas arbitrage, from initial tracking of premiums and discounts, to phased positioning, to waiting for market movements and profit realization, was executed smoothly according to our established strategy. No chasing highs or panic selling—just a perfect implementation of the core arbitrage principle of “low risk, steady returns.” Reflecting on the process, our success depended on thoroughly understanding Huabao Oil & Gas’s product attributes, clarifying the relationship between oil prices and oil stocks, and strictly following risk control rules. This is the core investment mindset I want to share: any investment tool requires understanding and comprehension before effective use and profit.

As Huabao Oil & Gas is the largest and most liquid oil and gas LOF fund in China, it is a high-quality target for cross-border LOF arbitrage. However, its QDII attributes, T+3 redemption rules, purchase restrictions, and exchange rate fluctuations all contain details that require attention. Its key feature of tracking upstream oil and gas stocks rather than crude oil is the foundation of our operations. Mastering these underlying logics allows us to stay calm amid market fluctuations and make decisive decisions when profits are realized, without being swayed by short-term ups and downs.

With today’s full exit of all positions, this round of Huabao Oil & Gas arbitrage officially concludes. Investing is a long-term journey. The end of one operation is the beginning of the next opportunity. I will continue to monitor high-quality arbitrage targets, focus on premium and discount opportunities, industry cycles, and explore stable investment opportunities with everyone.

Finally, a reminder: markets carry risks. Invest cautiously. All operations should be based on your own judgment. The best strategy is the one suitable for you. This third round of Huabao Oil & Gas arbitrage has now been successfully completed!