The investment market offers a wide range of products and vehicles to satisfy the diverse needs of investors. While some investment products are suitable for buy-and-hold, some are designed for short-term trading. For example, leveraged and inverse products (L&I Products) are not intended for holding longer than one day as their return may deviate from and may be uncorrelated to the multiple of the returns of the underlying index.
At present, there are about 20 L&I Products listed and traded on HKEX. Among these products, some are tracking various stock indices, such as the Hang Seng Index, Hang Seng TECH Index, NASDAQ Index, Nikkei Index, and CSI 300 Index. There are also L&I Products tracking Gold Futures Index and the Bitcoin Futures Index. It is important to understand that L&I Products should not be confused with passive ETFs that track the performance of the underlying indices. These two types of products have distinct investment objectives and mechanisms.
L&I Products are often referred to as “daily” products. Leveraged products seek to deliver a daily return equivalent to a multiple of the underlying index return, while inverse products seek to deliver a daily return that is a multiple of the inverse underlying index return. For example, under normal circumstances and before deduction of fees and charges, when the underlying index moves up by 10% on a given day, the two-time leveraged product (2x) tracking that index should deliver a gain of 20% on that day, while the two-time inverse product (-2x) tracking that index should deliver a loss of 20% on that day.
Currently, L&I Products in Hong Kong are subject to a maximum leverage factor of two times.
Investment returns may vary from expectation when held more than one day
“Daily return” is the fundamental concept of L&I Products. To achieve their investment objectives, L&I Products have to rebalance their portfolio every day so that their leverage factor is maintained at its target level. When we hold the product for more than one day, we should no longer assume that its return will be equivalent to the multiple of the underlying index return. Due to the compounding effect, the cumulative return of the product will deviate from the multiple of the underlying index’s cumulative return. This deviation becomes more significant with a higher leverage factor, longer holding period, inverse exposure, or more volatile performance of the underlying index.
In addition, the higher the leverage factor, the greater the negative impact of volatility on the product’s performance. With the same leverage factor, inverse products are more adversely affected by market volatility compared to leveraged products.
L&I Products are designed for short-term trading or for hedging purposes. These products are not intended for holding longer than one day. Given their complex structures and operations, these products are not suitable for investors with less experiences, or those who follow a buy-and-hold investment strategy. Investors are advised to constantly monitor the performance of their holdings on a daily basis.
20 December 2024
