Seeking profits from trade war, Hong Kong investors choose inverse ETPs

Inverse ETPs have gained serious momentum in Hong Kong as local investors look to hedge against trade-war induced market volatility.

CSOP Asset Management (CSOP), the Hong Kong-based investment arm of Shenzhen-based China Southern Asset Management, launched the city’s first -2x inverse product, the CSOP Hang Seng Index Daily (-2x) Inverse Product, on the Hong Kong Stock Exchange (HKEX) in May 28.

The product is designed to produce returns that are twice the inverse of the benchmark Hang Seng Index, subject to daily resets.

The product has been well-received in the market with net flows of HK$136 million (US$17.4 million) in the week after its initial public offering, boosting its total AUM to HK$543 million as of June 4.

The product has become one of the top ten most actively traded ETFs with average daily turnover of HK$176 million since its inception, according to figures from CSOP.

Brian Roberts, head of exchange-traded products at the HKEX, describes the launch of the -2x inverse fund as “significant progress” in the development of the city’s leveraged and inverse (L&I) products market.

HKEX emphasizes enriching its product mix aligns with the growth focus in the bourse’s latest strategic plan – to develop Hong Kong as the hub for ETPs in Asia, Mr. Roberts adds.

Compared to other major financial hubs like Seoul and Taipei, Hong Kong has been slow to develop L&I product market.

The relative lag comes despite these types of products flying well with Asian retail investors, and despite the corporate cop giving inverse products a green light three years ago.

Ivan Li, director of investment research department at Hong Kong-based CSL Securities, says the glacial growth of L&I ETPs in Hong Kong is strange given that other derivatives are highly traded.  However, he says inverse products will draw more investors’ attention with the recent market fluctuation.

“The existing hedging tools such as put options have their own deficiencies in trading size and cost. Inverse products can fill the gap to provide more options to investors,” Li said.

According to Melody He, CSOP’s managing director and head of sales and product strategy, the new inverse product allows investors to hedge against market risks under various market environments more easily.

“Leveraged and inverse products have been well developed for many years in the US, Europe, Japan and South Korea, while the market will still have plenty of room for growth in Hong Kong,” she adds.

Apart from the new inverse fund, CSOP also launched two products with one-time inverse multiple, the CSOP Hang Seng Index Daily (-1x) Inverse Product and the CSOP Hang Seng China Enterprises Index Daily (-1x) Inverse Product, in March 2017. The company also manages two leveraged products with two-time multiple.

Hong Kong’s L&I product market underwent a bumpy ride since Samsung Asset Management (Hong Kong) launched the city’s first L&I products in 2016.

Some ETF managers like Mirae delisted their products over the years partly because their underlying benchmarks looked less attractive to local investors or the stock market bullish run in 2017 undermined investors’ demand for inverse products.

Including CSOP’s new fund, there are currently 12 inverse products listed on the HKEX, with total market capitalisation of around HK$6 billion, accounting for 1.96% of total market capitalisation of ETPs listed in Hong Kong, according to the figures from the HKEX.

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