"Hu'an Gu Shi" Part Four | Zheng Ruxi: Embracing the Spirit of "Deep Cultivation" to Be a Thoughtful Player in the Market

In a low interest rate environment, bond assets naturally show characteristics such as increased volatility, declining expected returns, and lower Sharpe ratios. The past “just reliably collect coupon payments” approach may find it difficult to meet investors’ return requirements for a long time. The role of trading within portfolio management has increased significantly.

In a bond market where “involution” is severe, how to accumulate profits more effectively through trading, and continuously improve the portfolio to achieve performance that is far better than other portfolios—I believe the key is: first, to maintain a high level of sensitivity to the market environment and grasp the market’s future, or at least its latest operating logic, as early as possible; second, to genuinely and sincerely keep respect for the market, and become a “thoughtful person” in the market.

“Understanding**, memory, iteration”, continuously capture opportunities brought by marketshort-term**** overlooked logic**

In the current bond market, there is a rich variety of instruments, maturities, and rating structures, and different instruments follow different operating logics. When a logic is clearly and fully recognized by the market in the short term, it will obviously enter a “crowded” mode. If we overly focus on chasing hot spots, even if the short-term win rate is higher, its lower payout odds will reduce the long-term win rate.

By contrast, logic that the market overlooks in the short term may often be the one that creates profitable opportunities over the next period of time. The market is like that—“learning effects” and “forgetting” coexist. If we can, with a sustained mindset of deep cultivation, draw “nourishment” from past market micro-level operations, continuously learn from trading patterns that have “proven themselves” in the past, and try to iterate into new trading strategies, then we will also have more possibilities to gain even a slight edge amid future market fluctuations.

The above thinking is, to a certain extent, similar to the “learning mode” of AI. In fact, as the AI era gradually arrives, the fixed-income space has already seen all kinds of AI models for judging market trends, and many of them have also achieved relatively high correctness in internal tests. In this regard, I believe that although AI is strong at data mining and pattern recognition, fund managers’ personal intuitive judgment, cross-cycle experience accumulation, and their sharp insight into unstructured information remain core competitive advantages that algorithms are difficult to replicate.

In a low interest rate environment,** do a big “rotation of bond assets” article well**

Investors who have been paying attention to interest rate trends over the past few years might think that since current rates are very low, pure bond funds are somewhat “pointless,” “can’t bring anything new.” Actually, there is some truth to that, but it is not entirely so. I also agree with the proposition that “the potential downside extent and speed of interest rates will be significantly reduced.” However, in this process, as changes in fundamentals, liquidity, institutional behavior, and risk appetite occur, the opportunities for interest rate volatility will not be any fewer at all. Besides opportunities from one-way interest rate movement, changes in the yield curve structure are also endless—perhaps even “varied and exciting.”

The historical observations from our research team show that roughly every two weeks, there may be some significant fluctuations in certain important yield spreads (maturity, credit, or instrument spreads). That means that even if we always use a neutral duration strategy, as long as we accurately capture changes in the yield curve structure and hit the “timing” of the rotation among different types of bond assets, we still have the chance—at a relatively low absolute level of interest rates—to “pull out” new “varieties” of alpha that accumulate continuously.

Continuously improve the relative value evaluation concept and methods,** and keep optimizing the portfolio to enhance the Sharpe ratio**

About a dozen years ago, when I was working in a securities firm’s fixed-income proprietary trading department, I carried out a series of cross-instrument portfolio trading and spread trading, which to some extent helped change the fixed-income “living by the weather” approach. At that time, we frequently used instruments such as interest rate swaps and Treasury futures as tools in portfolios to hedge interest rate risk, but we still felt limited by the inadequacy of the hedging tools. It was not until I had the opportunity to participate in visits and exchanges with mainstream market makers and proprietary institutions on Wall Street that were organized by the company at the time that I gained inspiration. The reason overseas mainstream market-making institutions can achieve active and effective market making—and have a chance to generate stable middle-income—mainly comes from the fact that they have more hedging instruments to choose from, as well as a well-developed “relative value scoring system.” In real trading, once a market-making target is executed after being clicked and matched by the market, the market maker does not need to buy back the same target in the market. It only needs to buy back a comparable instrument of the same type with a higher value score. What I, as a manager of a fixed-income account, learned from this is: first, enhance the “depth” across instruments—unless the bond types have obvious credit flaws, you should deeply study the patterns of their volatility. The more instruments involved, the sturdier, tighter, and more detailed this “pricing network” becomes. Second, establish a truly effective “relative value evaluation system” that suits you. The relative value evaluation of individual bonds is not merely a simple high-versus-low comparison of spreads; instead, it is a “spread-repairability feasibility analysis” built on market-dominant operating logic, institutional behavior preferences, and other foundations.

So, in the years I have “toiled and tested” in the public fund industry, the above理念 and methods of “relative value evaluation” have continued to help me and my portfolio. One major characteristic of pure open-end bond funds is that—every day—there may be changes in scale caused by subscriptions and redemptions, and the timing of inflows and outflows is often uncertain. What I need to do is actually straightforward. First, no matter when investors’ capital enters, I will strive to select the assets with the best value for the market at that time. Second, every day, whether facing subscriptions and redemptions or not, I will do my best to improve this portfolio’s return-to-risk ratio. If I were to use a metaphor, my portfolio is like a “big pot,” and the assets in it are like the “food” in the pot. I will use appropriate methods to “stir-fry,” meaning I continuously—through trading based on relative value evaluation—remove “crowded” assets, add “better value” assets, and try to bring the freshest and most delicious “food” to investors. Judging from the historical performance of the portfolio I manage, it has generally performed well in terms of the Sharpe ratio, drawdown control, and other aspects.

Worth mentioning is that the理念 of continuously optimizing a portfolio using relative value evaluation thinking is not only effective for pure bond portfolios, but also works for fixed income+ blended portfolios. Especially for assets like convertible bonds, because they have the presence of mandatory redemption, the return curve of convertible bonds ultimately converges to a steady state, and the price upside potential of convertible bonds is more “controllable” than that of stocks. When managing convertible bond portfolios within an intermediate-level bond fund, I will, across each major segment, screen out a group of targets whose risk is relatively controllable and which still have some upside potential, based on indicators such as the underlying stock’s fundamentals and valuation, the convertible bond price and its premium rate. Through active trading, I continuously eliminate crowded-segment instruments and potential forced-redemption risk instruments, and ultimately seek “sustainable development” in a significantly expensive convertible bond market.

My view on the market in 2026——** gains and thorns are very close,**** continue to整理 your thoughts and move forward lightly**

Looking ahead to 2026, among the major factors that will drive bond market performance, the first in my view is the continued room for easing by the central bank. Although the Central Economic Work Conference pointed out “to flexibly and efficiently use tools such as interest-rate cuts and reserve requirement cuts,” the market interprets it as more limited easing room. Still, directionally, it is clearly easing—just a question of timing and when exactly to act. Second is still the change in risk appetite. The stock bull run in 2025, to a large extent, came from narrative-driven, expected improvements. As the market rally deepens, the needed driving force may shift toward a rebound in earnings. In other words, it will require more support from macroeconomic data. At present, the conditions that would continuously support total-economy data do not seem sufficient. Third is the change in prices and expectations for them. Recently, under the impact of major geopolitical events, inflation expectations have started to rise along with oil prices. Based on historical similar scenarios, when inflation happens but the economy is not strong, market dynamics become relatively complicated. There are clear frictions both upward and downward for interest rates. Among this, getting the trading rhythm right is extremely difficult, because severe uncertainty about where geopolitical events will lead is mixed into it.

Summary: In a bustling and noisy market, keeping your own true self, sticking to your own style, and playing to your strengths while avoiding weaknesses—this is very important in my view. Investing still needs to hold the belief that “every day is a new day.” Keep yourself as calm as possible, and never give up on accumulating and understanding past market cases, continuing to iterate. With the attitude of a “thoughtful person,” you welcome the return of opportunities. I believe in “equality for everyone in the face of the market.” As an ordinary participant among investors, I hope to share and encourage you as well.

Source: Huian Fund

Risk warning: Funds involve risk. Investors should exercise caution.