Priority Inferior Rating Fund

Original article published only in Chinese
Below is a machine-translated version

In the financial market, in addition to public funds, many institutional and individual professional investors participate in private equity fund investment. Compared with public funds, private equity funds have the advantages of wider investment targets and more flexible structure, so they are more subject to professional investors. Favor. This type of fund is very popular in the Mainland, but the emergence of Hong Kong and Macao is still a matter of recent years.
This investment column takes the investment business launched by the Bank of China Macau Branch as an example to introduce readers to graded bond private equity funds. The graded bond funds have priority and inferior categories to meet the income and risk preferences of different types of investors.
Recently, the Bank of China Macau Branch cooperated with Chinese-funded financial institutions to launch new investment options for high-end customers in the field of investment and wealth management – ​​priority post-grading funds.
From the perspective of investment strategy, the priority is the same as the target invested by the inferior level. Graded bond funds are no different from ordinary bond funds in terms of investment operation. The difference is that the distribution of returns and the risk structure of graded bond funds are divided into priority and inferior.
From the perspective of return distribution, the return of priority is fixed income, that is, there will be a relatively fixed and capped expected rate of return, and the return is given priority; and the inferior level is leveraged income, after obtaining the fixed income after the priority Will receive the remaining income of the fund.
From the perspective of risk structure, the risk of the fund is borne by the inferior level. When the fund’s investment losses, the inferior investment assets will be used for compensation first. If the inferior level is completely lost, the priority investment assets will be touched.
Therefore, from the perspective of investors, the priority category is suitable for investors with low risk and high security requirements for the principal. This kind of stable and fixed return product is very popular among investors. The inferior level is suitable for seeking. Investors with higher risk appetite, preference for enhanced returns, and better prospects for the future performance of the fund’s chosen investment targets.
Graded bond fund income example
Target customer’s target rate of return: annualized rate of return is fixed at 5%
Fund investment target: Asian high-yield bonds
Priority and inferior ratio: 1:1
Priority income
When the fund investment target rose by 10% 5% 15%
When the fund investment target fell 10% 5% -15%

Priority return guarantee mechanism
In the grading fund, the priority is protected by the inferior level, and the fund company monitors the assets of the priority investors to maximize the proportion of the priority and the inferior level, and has a relevant control proportional mechanism. When the ratio of priority to inferior level touches the alert level, the fund company will take action to prevent the deterioration of the ratio.
Since the risks and market fluctuations are borne by the inferior level, the price of the priority does not change, but the price fluctuation of the inferior level causes the ratio to change. In the following three examples of different ratios, what changes will occur in the fund prices of priority and inferior levels, as well as the mechanism of the fund company.
1. Under normal circumstances, the ratio of priority to inferior level is as follows:
Proportion priority asset
2:1 200 100

2. The market situation is not ideal, and the ratio of priority to inferior level deteriorates to 4:1:
Proportion priority asset
4:1 200 50
Fund company control proportional mechanism: stop priority subscription, post-grade redemption
3. The market situation is not ideal, and the ratio of priority to inferior level deteriorates to 8:1:

Proportion priority asset
8:1 200 25
The fund company controls the proportional mechanism: the inferior level needs to make up the position in X working days. If the position is not timely replenished, the fund will be liquidated, and the assets with priority protection will be taken as the first condition.
Meet different customer needs
In summary, the hierarchical structure of priority and inferior level can largely meet the needs of different types of customers. Priority investors only participate in the distribution of expected returns. Inferior investors can participate in the distribution of residual income. Priority is more suitable for investors who need a stable rate of return. Inferior level can satisfy investors who have high returns. But high returns also mean high risks, and inferior investors take on greater risks.


To put an imperfect analogy, the model of such a fund is a bit like the investor deposits funds to the bank, and the bank gives a fixed interest on the deposit; after the bank obtains the funds, it borrows the funds through lending and charges higher interest. Once the loan has bad debts, within a certain amount, the bank will use its own capital to make up for the loss, and will not let the depositor bear the loss.
The bond-type priority inferior grading fund can provide a new option for a more balanced risk and return for investors who are currently interested in bond investment but are worried that there will be large fluctuations in bond prices in the future.