Private Equity Report: Bond Strategy Performance Declines

The leading performance of bond strategy is diminishing. The latest statistics from Private Fund Ranking Network show that as of September 13th, the average return of private funds this year has been negative, with only bond strategies and CTA (Commodity Futures) strategies achieving profits, with bond strategies leading in returns and equity strategies lagging behind.

However, looking at the short-term performance, the bond strategy private funds that have been leading in performance this year have seen a significant decline in returns since July. Many top private fund professionals believe that there are both risks and opportunities in the bond market going forward. In terms of investment operations, bond strategy private funds need to diversify their sources of returns while also guiding investors to lower their return expectations.

Bond strategies and CTA strategies achieve positive returns

The latest statistics from Private Fund Ranking Network show that as of September 13th, the average drawdown of private funds in the past month reached 2.22%, and the average drawdown of private funds this year has expanded to 9.17%.

Looking at the strategies, bond strategies and CTA strategies have achieved positive returns.

According to statistics, as of September 13th, the average return of bond strategy private funds this year is 2.13%, with CTA strategy following closely with an average return of 1.62%. Due to the continuous fluctuation and adjustment of the equity market, the equity strategy performance is at the bottom, with an average drawdown of up to 13.3% this year, while the average drawdown of portfolio fund strategy and multi-asset strategy are 5.38% and 6.14%, respectively.

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"Against the backdrop of high institutional trading enthusiasm and the cessation of banks' 'manual interest supplementation' behavior, the bond market has overall shown a bull market atmosphere this year, while the stock market is still hovering at the bottom, with no clear investment main line, increasing the difficulty for fund managers, thus leading to a significant performance divergence among different strategy private funds," a private fund researcher in Shanghai admitted.

Top private funds carry out "risk front-loading"

Despite the leading performance of bond strategies, the average return has significantly declined since July.

Data from Private Fund Ranking Network shows that the average return of bond strategy private funds in the first half of this year was 4.79%, with a positive return ratio as high as 79%, while as of September 13th, the average return of this strategy has declined to 2.13%. At the same time, third-party platform data shows that the CSI Pure Bond Fund Index monthly line fell in August.Paipai Network's wealth management consultant Yao Xusheng stated that, on one hand, due to the pronounced seesaw effect between stocks and bonds, the scale of bond strategy funds has expanded rapidly, leading to a significant increase in strategy congestion, which inherently carries the risk of diminishing returns. On the other hand, as the central bank's stance and policy direction undergo marginal changes, the bond market faces short-term adjustment pressures.

Interviews with journalists revealed that since July, many leading private equity firms have proactively reduced leverage and duration.

A Beijing-based private equity firm with assets over ten billion yuan noted that due to the strong demand for low-risk assets and the low financing needs of enterprises and residents, the bond market has continued to perform well. However, compared to repurchase rates, the current bond spreads, term spreads, and credit spreads are all at extremely low levels, with low risk compensation, thus it is advisable to reduce leverage and duration in the short term, and closely monitor the interest rates displayed by wealth management products, changes in the liability side of non-bank institutions, and the central bank's next moves.

There is a consensus on diversifying sources of returns.

Faced with the opportunities and risks in the bond market, many private equity firms are actively diversifying their sources of returns and guiding investors to lower their return expectations for pure bond strategy products.

Yin Ye Investment believes that due to the relatively consistent strategies in the bond market and the long average duration of institutional holdings, which are at a historical high, if market trends reverse, product net values will face significant redemption risks. Therefore, the company has expanded its asset categories, including convertible bonds, exchangeable bonds, and public REITs.

Zhu Run Investment also stated that this year the company has focused on the "fixed income +" strategy, further expanding its layout in quantitative investment, convertible bonds, and ETF arbitrage, and subjective long positions, and has made comprehensive arrangements in terms of talent, organizational structure, and business processes to diversify sources of returns.

Additionally, several private equity insiders revealed that based on the performance of bond strategies in the early stages, most investors who subscribed to bond strategy products in the second and third quarters had return expectations of over 6% annualized return rate. However, under the current macro environment and strategy scale, it is difficult for bond investments to meet investors' expectations. Therefore, many managers are strengthening guidance on investor return expectations and controlling the issuance pace of pure bond funds on the sales side.