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Why are high-net-worth individuals willing to invest in private equity funds with a minimum investment of 1 million yuan, even though their information transparency is not as good as that of public equity funds? The key is that private equity funds have stronger Alpha attributes. Alpha, or excess returns, mainly depends on the professional ability of fund managers. Unlike public equity funds, private equity funds adopt an excess return sharing mechanism, which greatly attracts outstanding talents.

The freedom of private equity funds

Private equity funds enjoy greater freedom in terms of investment scope and regulatory details. They can invest in almost all types of securities in the secondary market, including stocks, bonds, commodities, futures, options and other derivatives, and even over-the-counter tools such as snowballs, airbags, and swaps. In addition, private equity funds have no restrictions on the proportion of single-ticket holdings, no restrictions on intraday turnaround transactions, and no restrictions on positions in stock strategies. This freedom provides fund managers with a wide range of operating space, making it easier to achieve Alpha.

Alpha of Equity Strategies

In stock strategies, the freedom of private equity funds allows fund managers to focus on a small number of stocks that meet their strict standards, thereby achieving Alpha from depth. At the same time, quantitative funds can use high turnover rates to capture short-term market fluctuations and achieve Alpha from breadth through statistical models. The A-share market has low efficiency, a large number of retail investors, and good liquidity, which provides private equity funds with more Alpha opportunities. The market neutral strategy hedges market Beta through stock index futures and earns stable Alpha returns. In addition, the stock long-short strategy can earn Alpha from long and short positions while maintaining market neutrality.

Alpha of Bond Strategies

In the past few years, despite the poor performance of the stock market, the bond market has ushered in a bull market. Private equity funds have also performed well in bond strategies. Urban investment bonds and other products have created significant returns for investors due to the deep understanding and early intervention of managers. In the context of frequent credit risks, some bond managers have achieved high returns on bond products with their credit analysis and trading capabilities. Convertible bonds, as a product that has both debt and equity characteristics, also provide excellent managers with the opportunity to create a beautiful net asset value curve. As a high-leverage product, treasury bond futures are an effective tool to amplify bond market trends.

Alpha of CTA and Option Strategies

Many quantitative stock managers are also involved in quantitative CTA management. The futures market is naturally long and short, and managers can capture the volume and price characteristics in a quantitative way to achieve Alpha. The price difference in the futures market provides opportunities for arbitrage strategies. Managers use pricing advantages and trading systems to obtain pure Alpha arbitrage returns for investors. Option strategies provide the possibility for volatility trading. Professional option managers have achieved a robust yield curve through means such as put options, volatility trading and surface volatility arbitrage.

Macro andcomplexAlpha of the strategy

In different macro environments, the performance of major asset classes such as stocks, bonds, and commodities varies. Macro hedge strategy managers use major asset allocation and rotation to achieve an all-weather strategy that can adapt to any macro environment. Public funds mainly earn beta returns from the market, while private funds mainly earn excess returns for high-net-worth individuals. As China enters the era of asset allocation, private equity funds will play an increasingly important role in the asset allocation of high-net-worth individuals.

Warm reminder: The above content is for reference only and does not constitute investment advice. The market is risky and investment should be cautious.

"Private Equity Club" is jointly launched by NetEase Finance and Zemujia.