The year 2024 has brought about significant changes in the capital market environment, leading to a noticeable shift towards passive investingThis burgeoning trend has garnered attention from a diverse group of investors, prominently reflected in the increasing popularity of index fundsAs of the third quarter of 2024, domestic passive index funds have finally exceeded active equity funds in terms of total market value for the first timeAccording to data from Choice, by January 17, 2025, the shares of stock-based ETFs had surged by nearly 300 billion since the beginning of 2024, resulting in a staggering net inflow of nearly 800 billion yuan when calculated at average transaction pricesThis marks a pivotal moment in the investment landscape.

The conundrum arises: why is there such a pronounced tilt toward "passive investing"? Generally speaking, passive investing is represented by products like exchange-traded funds (ETFs) and index fundsThe core objective of these products is to track a particular market index, such as the CSI A100 ETF or the Shenzhen-Hong Kong 300 ETF, without actively selecting stocks or adjusting positionsOn the other side, we have active investing, which involves fund managers who actively select stocks, time the market, and allocate assets across different sectorsThe recent successes of passive index funds can largely be attributed to various factors.

Conventional active equity funds have to contend with the fact that passive index funds, especially when it comes to investing in ETFs, come with lower transaction costs and enhanced transparencyThese factors have contributed to a paradigm shift in investor preferencesThe active trading of ETFs has seen impressive growth, with non-money market ETFs reaching a staggering total trading volume of 31.46 trillion yuan in 2024, representing a significant year-on-year increase of 56%.

In addition, measures aimed at capital market reform and the influx of long-term capital into the market have also bolstered the demand for passive index fund allocations

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However, despite the trend towards passive investment, a number of active equity funds have still captured the interest of investors, with some funds continuing to grow in sizeThis suggests that active funds still hold a significant level of confidence among investors.

Under the current market conditions, active equity funds maintain their distinct value propositionUnlike passive index funds, which mechanically track market movements, active funds can adapt flexibly to changing market trendsFurthermore, under the management of skilled active managers, there remain opportunities for outperforming the index, thus yielding excess returns particularly in certain market environments.

It becomes evident that passive investment cannot wholly replace active investment; rather, they function as complementary strategies that can cater to differing investor needs.

When discussing the dynamics between "active" and "passive" investing, the concepts of "Alpha" (α) and "Beta" (β) come into play, which are essential terminologies within the investment sphereAlpha is often regarded as excess returns that active funds may generate through strategic stock selection and market timing, which allows them to surpass the benchmark indexOn the opposite side, Beta represents the market return itself, wherein investors earn returns closely aligned with market indices through index funds, gauging the overall performance and trend of the market.

Simply put, Alpha corresponds to active funds, while Beta aligns with passive ones, showcasing their respective attributesHowever, the advantages and disadvantages of both are noteworthyAlpha returns arise primarily from the fund manager's strategic decisions and selections, which may not always mirror market trends; if a fund can maintain positive Alpha over the long term, it is indicative of a manager's capability to generate excess returnsNonetheless, a glaring reality exists: many active funds struggle to sustain positive Alpha in the long haul.

Focusing on Beta returns, they largely originate from the sustained growth of the market

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When the overall market rises, Beta returns can provide stable gains over timePassive index funds boast lower management fees, making them well-suited for long-term investmentsHowever, while Beta returns replicate market performance, they do not inherently provide opportunities for excess returns.

The current market situation, where passive index funds amount to more than their active counterparts, does not signify the complete disappearance of Alpha returnsFor instance, in the realm of small-cap stocks, active funds can showcase their competitive edgeAdditionally, in certain structural opportunities—such as the burgeoning sectors of artificial intelligence and renewable energy—active funds might identify high-growth companies and secure those coveted excess returns.

In the grand scheme, Beta returns form the nucleus of long-term investment strategies, catering to the majority of investors and likely leading to a continual increase in passive index fund market shareConversely, Alpha returns remain valuable but necessitate careful selection by investorsThe synergy created through a combination of both strategies may enrich a fund portfolio, thereby broadening the profit potential.

The strategic approach to harmonizing these dynamics can be distilled into three pivotal stepsFirst, harness Beta to capture the long-term growth potential by capitalizing on general upward market trendsSecond, exploit Alpha to chase excess returns through strategic placementsFinally, merge both approaches to not only enhance return stability but also widen the overall revenue horizon.

The fundamental nature of Beta implies that the essence lies in selecting appropriate index funds for long-term holding, employing a strategy defined by "long-term holding + low cost + diversified investment." Consistent optimization of this strategy may yield profitable opportunities and ensure a stable capture of market growth benefitsSuch funds could constitute roughly 60% to 80% of an entire investment portfolio.

On the other hand, Alpha returns hinge on the active management approach, necessitating the identification of funds with a proven capability to outperform the market over time

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