- The Product is a derivative product and not suitable for all investors. There is no guarantee of the repayment of principal. Therefore your investment in the Product may suffer substantial/total losses.
Inverse performance risk
- The Product tracks the inverse Daily performance of the Index. Should the value of the underlying securities of the Index increase, it could have a negative effect on the performance of the Product. Unitholders could, in certain circumstances including a bull market, face minimal or no returns, or may even suffer a complete loss, on such investments.
Long term holding risk
- The Product is not intended for holding longer than one day as the performance of the Product over a period longer than one day will very likely differ in amount and possibly direction from the inverse performance of the Index over that same period (e.g. the loss may be more than -1 times the increase in the Index).
- The effect of compounding becomes more pronounced on the Product’s performance as the Index experiences volatility. With higher Index volatility, the deviation of the Product’s performance from the inverse performance of the Index will increase, and the performance of the Product will generally be adversely affected.
- As a result of Daily rebalancing, the Index’s volatility and the effects of compounding of each day’s return over time, it is even possible that the Product will lose money over time while the Index’s performance falls or is flat.
Inverse Product vs. short selling risk
- Investing in the Product is different from taking a short position. Because of rebalancing the return profile of the Product is not the same as that of a short position. In a volatile market with frequent directional swings, the performance of the Product may deviate from a short position.
Unconventional return pattern risk
- Inverse products aim to deliver the opposite of the daily return of the Index. If the value of the Index increases for extended periods, the Product will likely to lose most or all of its value.
Risk of rebalancing activities
- There is no assurance that the Product can rebalance its portfolio on a Daily basis to achieve its investment objective. Market disruption, regulatory restrictions or extreme market volatility may adversely affect the Product’s ability to rebalance its portfolio.
- The rebalancing activities of the Product typically take place near the end of a Business Day, at or around the close of trading of the underlying market, to minimise tracking difference. As a result, the Product may be more exposed to the market conditions during a shorter interval and may be more subject to liquidity risk.
Intraday investment risk
- Leverage factor of the Product may change during a trading day when market moves but it will not be rebalanced immediately. The Product is normally rebalanced near the end of a Business Day, at or around the close of trading of the underlying market. As such, return for investors that invest for a period less than a full trading day may be greater than or less than the inverse investment exposure to the Index, depending upon the movement of the Index from the last rebalancing until the time of purchase.
Portfolio turnover risk
- Daily rebalancing of Product’s holdings causes a higher level of portfolio transactions than compared to the conventional ETFs. High levels of transactions increase brokerage and other transaction costs.
Futures contracts risks
- The Product is a futures based product. Investment in futures contracts involves specific risks such as high volatility, leverage, rollover and margin risks. The leverage component of futures contracts can result in a loss significantly greater than the amount invested in the futures contracts by the Product. Exposures to futures contracts may lead to a high risk of significant loss by the Product.
- A “roll” occurs when an existing futures contract is about to expire and is replaced with a futures contract representing the same underlying but with a later expiration date. The value of the Product’s portfolio (and so the Net Asset Value per Unit) may be adversely affected by the cost of rolling positions forward as the futures contracts approach expiry.
- There may be imperfect correlation between the value of the underlying reference assets and the futures contracts, which may prevent the Product from achieving its investment objective.
- Prices of the Product may be more volatile than conventional ETFs because of the Daily rebalancing activities.
Holding of HSCEI Futures Contracts restriction in number risk
- The positions of futures contracts or stock options contracts held or controlled by the Manager, including positions held for the Manager’s own account or for the funds under its management (such as the Product) but controlled by the Manager, may not in aggregate exceed the relevant maximum under the Securities and Futures (Contracts Limits and Reportable Position) Rules (the “Rules”). Accordingly, if the position held or controlled by the Manager reaches the relevant position limit or if the Net Asset Value of the Product grows significantly, the restrictions under the Rules may prevent creations of Units due to the inability under the Rules of the Product to acquire further HSCEI Futures Contracts. This may cause a divergence between the trading price of a Unit on the SEHK and the Net Asset Value per Unit. The investment exposure could also deviate from the target exposure which adds tracking error to the Product.
Concentration and mainland China market risk
- The Product is subject to concentration risks as a result of tracking the inverse performance of a single geographical region or country (the PRC including Hong Kong). The value of the Product may be more volatile than that of a fund having a more diverse portfolio of investments. The Index constituents are companies incorporated in the PRC which are listed on the SEHK and primarily traded in Hong Kong, and have substantial business exposure to the PRC, an emerging market. Investments of the Product may involve increased risks and special considerations not typically associated with investment in more developed markets, such as liquidity risks, currency risks/control, political and economic uncertainties, legal and taxation risks, settlement risks, custody risk and the likelihood of a high degree of volatility.
Passive investments risks
- The Product is not “actively managed” and therefore the Manager will not have discretion to adapt to market changes when the Index moves in an unfavourable direction to the Product. In such circumstances the Product will also decrease in value.
- The trading price of the Units on the SEHK is driven by market factors such as the demand and supply of the Units. Therefore, the Units may trade at a substantial premium or discount to the Net Asset Value.
- As investors will pay certain charges (e.g. trading fees and brokerage fees) to buy or sell Units on the SEHK, investors may pay more than the Net Asset Value per Unit when buying Units on the SEHK, and may receive less than the Net Asset Value per Unit when selling Units on the SEHK.
Trading differences risk
- The HKFE and the SEHK have different trading hours. As the HKFE may be open when Units in the Product are not priced, the value of the HSCEI Futures Contracts in the Product’s portfolio may change at times when investors will not be able to purchase or sell the Product’s Units. Difference in trading hours between the HKFE and the SEHK may increase the level of premium/discount of the Unit price to its Net Asset Value.
- Trading of the Index constituents closes earlier than trading of the HSCEI Futures Contracts so there may continue to be price movements for HSCEI Futures Contracts when Index constituents are not trading. There may be imperfect correlation between the value of the Index constituents and the HSCEI Futures Contracts, which may prevent the Product from achieving its investment objective.
Tracking error and correlation risks
- Fees, expenses, transaction costs, high portfolio turnover, liquidity of the market and the investment strategy adopted by the Manager may result in tracking error, and the reduced correlation between the performance of the Product and the Daily inverse performance of the Index. The Manager will monitor and seek to manage such risk in minimising tracking error. There can be no assurance of exact or identical replication at any time of the Daily inverse performance of the Index.
- The Product may be terminated early under certain circumstances, for example, where there is no market maker, the Index is no longer available for benchmarking or if the size of the Product falls below HKD80 million. Any distribution received by a Unitholder on termination of the Product may be less than the capital initially invested by the Unitholder, resulting in a loss to the Unitholder.
Reliance on market maker risks
- Although it is a requirement that the Manager will ensure that at least one market maker will maintain a market for the Units and gives not less than 3 months’ notice prior to terminating market making arrangement under the relevant market maker agreement, liquidity in the market for the Units may be adversely affected if there is only one market maker for the Units. Also, the Product may be required by the SFC to be terminated if there is no market maker for the Units. There is no guarantee that any market making activity will be effective.