AT first glance, the boom in private-equity buyouts looks like a boon to traditional investors such as mutual funds.Demand from the private-equity crowd gets a lot of credit for the rise in stock prices this year. Every time the market starts to sag, along comes a new bid for one company or another, reinforcing the idea that stocks are a bargain.

What's more, the high-yield bonds commonly sold to finance these buy-outs have added some quality names to the menu of issuers in the junk-bond market. And junk-bond mutual funds are thriving these days.

According to Bloomberg data, the average US high-yield bond fund returned 11.9 percent in the past year through the middle of this week; 9.3 percent a year in the past three years, and 9.3 percent for the past five years.

On closer inspection, however, private-equity firms make dubious friends for old-line fund managers. Over time they pose a serious competitive threat.

The current wave of buy-outs is a natural free-market response to one of the defining financial features of the times — cheap, abundant credit. If you look at stocks in isolation, they might not strike you as unusually attractive bargains. At between 17 and 18, the price-earnings ratio of the Standard & Poor's 500 Index is middling by historical standards.

The picture changes when stocks are set against the background of unusually low interest rates. At an average yield of 4.5 percent over the past three years, the 10-year US Treasury note has traded at 22.2 times its annual interest payments.

Is there an arbitrage that can be done here? Why yes, if I simply buy a stock and sell a bond I gain a relatively low-priced asset in exchange for a high-priced one. So that's what I do, I buy the outstanding stock of Such-and-Such Enterprises, then turn around and sell bonds of Such-and-Such in a roughly equivalent amount.

As a bonus, there may be some things I can do with Such-and-Such as its private owner to increase its market value. In a year or two or three, perhaps I can translate those changes into a profit when I sell Such-and-Such back to public ownership again.

Along the way, I create value that might not otherwise ever have existed. Where's the harm to mutual funds or any of my other fellow investors?

Well, of course, if my strategy works I got the better of them, earning far more for myself than they got from the sale of their stock or their investment in the bonds I issued. That's only part of the story.

My leveraged buyout amounted to a trade across asset classes (stocks and bonds), something the typical mutual fund isn't set up to do. A stock fund pretty much sticks to stocks, a bond fund to bonds. Even a fund that is free to range from one type of asset to another is likely to be limited in its manoeuvrability, given such strictures on funds as the need to price all their holdings daily.

With my buy-out I have, in effect, transferred a chunk of investment return to a realm where mutual funds can't get at it. Oh well, you may say, they can simply look to other stocks to make up for it. It's a big world out there and getting bigger all the time, what with globalisation and all.

Maybe so, but today's sophisticated client doesn't want just any old return from an active money manager. He wants market-beating returns, known in the trade as alpha. He can get a market return from a low-cost index fund.

Presumably, there is a less-than-infinite supply of alpha to go around. To whatever extent private-equity firms, hedge funds, and the like can grab some of that alpha away from traditional buy-and-hold investors such as mutual funds, the old-style investors are put at a disadvantage. So far, this threat is more theoretical than actual. Plain old mutual funds are thriving, with $11.1 trillion-plus of US assets, and still growing. Could a recession or some other misadventure come along and blow up a couple of private-equity deals, deflating the whole buyout balloon? Private equity has always been a highly cyclical world.

Even in that event, though, surely the techniques introduced by modern financial engineers aren't going to disappear. They have permanently changed the game. With all their great attributes, mutual funds aren't exempt from the danger of falling behind the times.

(Chet Currier is a Bloomberg News columnist. The opinions expressed are his own.)