Leveraged and inverse products (L&I Products) are derivative products traded on the stock exchange. L&I Products are structured as funds, but unlike conventional funds, they are not intended for holding longer than one day and are designed for short term trading or hedging.
Leveraged products seek to deliver a daily return equivalent to a multiple of the underlying index return.
Inverse products seek to deliver the opposite of the daily return of the underlying index.
You can trade L&I Products via your intermediary (broker or bank) on the stock exchanges, similar to trading stocks.
L&I Products have clear investment objectives, strategies and mechanics. Both product information and trading information are easily accessible.
You can use L&I Products for hedging or taking leveraged/inverse position at a lower cost than using some other trading strategies such as margin financing and short selling.
Leveraged and inverse products (L&I Products) are derivative products traded on the stock exchange. They are structured as funds, but unlike conventional funds, not intended for holding longer than one day and are designed for short term trading or hedging.
Leveraged products aim to deliver a daily return equivalent to a multiple of the underlying index return e.g. two times of what the underlying index does.
Inverse products aim to deliver the opposite of the daily return of the underlying index.
| Leveraged Products | Inverse Products |
|---|---|
| Seeking to magnify daily returns | Seeking profit from a market decline |
| Obtaining a target level of exposure using less cash | Helping to hedge against an expected decline |
| Overweighting a market segment without committing additional cash | Underweighting exposure to a market segment |
The index that L&I Products track can be spot market index or futures index that uses different ways to measure return, e.g. price return, excess return and total return.
Leveraged and inverse products (L&I Products) are often regarded as "daily" products because these products aim to deliver a multiple or the opposite of the return of its underlying index on a daily basis. They have to rebalance their portfolio on a daily basis in order to achieve their investment objective.
A L&I Product mainly invests in derivatives, typically swaps or futures to achieve its investment objective
Swaps: The L&I Product pays the swap counterparties a fee, and the swap counterparties deliver to the L&I Product a multiple or the opposite of the return of the underlying index on a daily basis. The L&I Product is exposed to the credit and default risks of the swap counterparties.
Futures: The L&I Product achieves its investment objective by investing in futures contracts. There are transaction costs on trading futures contracts. The L&I Product is exposed to the risk that the performance of the futures contracts may deviate from the L&I Product's investment objective.
As a result of rebalancing, a L&I Product is only expected to track the multiple/opposite return of the underlying index for the rebalancing interval, typically one day. It may not track the multiple/opposite return of the underlying index when it is held for less than a full trading day or overnight.
In Hong Kong, the leverage factor of L&I Products is subject to a cap. Leveraged products are subject to a maximum leverage factor of two times (2x), i.e. deliver a daily return equivalent to two times of the underlying index return. Inverse products are subject to a maximum leverage factor of one time (-1x), i.e. no leverage at all.
The name of leveraged and inverse products (L&I Products) should enable investors to clearly identify these products.
The name of a L&I Product will tell you whether it is a leveraged or inverse product and its leverage factor. The word "daily" will also form part of the name. For example,
A two-time leveraged product should be called -> "[Issuer] [Index] Daily (2x) Leveraged Product"
A one-time inverse product should be called -> "[Issuer] [Index] Daily (-1x) Inverse Product"
In case a L&I Product uses swaps to achieve its investment objective (swap-based L&I Product), an asterisk (*) and an annotation in English "(*This is a synthetic product)" will appear right after the swap-based L&I Product's name in the product's offering documents, marketing materials, notices as well as other communication materials issued to Hong Kong investors.
For example, the annotation to the name of a two-time swap-based leveraged product should be
ABC Daily (2x) Leveraged Product * (*this is a synthetic product)
The English and Chinese stock short names of L&I Products will include markers so that you can identify L&I Products on the stock pages of HKEX's securities trading system. "L", "I", "F" and "X" are markers for leveraged products, inverse products, futures-based L&I Products and swap-based L&I Products respectively.
The markers shall be placed at the beginning of the English and Chinese stock short names for all L&I Products listed on SEHK.
For example,
The stock short name of a futures-based 2-time leveraged product will be -> F L 2 ABC
The stock short name of a swap-based inverse product will be -> X I ABC
The markers will not appear in the full names of L&I Products.
It is available for Professional Investor or Non- Professional Investor.
Trading L&I Products involves investment risk and are not intended for all investors. There is no guarantee of repaying the principal amount.
Prices of L&I Products may be more volatile than conventional exchange traded funds (ETFs) because of using leverage and the rebalancing activities.
L&I Products are different from conventional ETFs. They do not share the same characteristics and risks as conventional ETFs.
L&I Products are not intended for holding longer than the rebalancing interval, typically one day. Daily rebalancing and the compounding effect will make the L&I Product's performance over a period longer than one day deviate in amount and possibly direction from the leveraged/inverse performance of the underlying index over the same period. The deviation becomes more pronounced in a volatile market. As a result of daily rebalancing, the underlying index's volatility and the effects of compounding of each day's return over time, it is possible that the leveraged product will lose money over time while the underlying index increases or is flat. Likewise, it is possible that the inverse product will lose money over time while the underlying index decreases or is flat.
There is no assurance that L&I Products can rebalance their portfolios on a daily basis to achieve their investment objectives. Market disruption, regulatory restrictions or extreme market volatility may adversely affect the rebalancing activities.
When the stop-loss mechanism is triggered on a given business day, the L&I Product may not be able to deliver a daily return equivalent to a multiple or the opposite of the daily return of the (non-leveraged non-inverse) underlying index.
The rebalancing resulted from the stop-loss mechanism would restore the leverage factor of an L&I Product, back to its target 2x or -1x level. The leverage factor would thus be smaller in absolute term compared to such multiple or opposite of the daily return of the underlying index when no stop-loss mechanism is triggered. If the performance of the underlying index reverses during the remaining of trading day after the stop-loss mechanism is triggered, investors of the L&I Products may not be able to capture the gain from the reversal of the underlying index return to the same extent that they may have if the stop-loss mechanism had not been adopted.
Rebalancing typically takes place near the end of a trading day (shortly before the close of the underlying market) to minimize tracking difference. The short interval of rebalancing may expose L&I Products more to market volatility and higher liquidity risk.
Leverage factor of L&I Products may change during a trading day when the market moves but it will not be rebalanced until day end. The L&I Product's return during a trading day may be greater or less than the leveraged/opposite return of the underlying index.
Daily rebalancing causes a higher levels of portfolio transaction when compared to conventional ETFs, and thus increases brokerage and other transaction costs.
Fees, expenses, transactions cost as well as costs of using financial derivatives may reduce the correlation between the performance of the L&I Product and the leveraged/inverse performance of the underlying index on a daily basis.
L&I Products must be terminated when all the market makers resign. Termination of the L&I Product should take place at about the same time when the resignation of the last market maker becomes effective.
The use of leverage will magnify both gains and losses of leveraged products resulting from changes in the underlying index or, where the underlying index is denominated in a currency other than the leveraged product's base currency, from fluctuations in exchange rates.
Inverse products aim to deliver the opposite of the daily return of the underlying index. If the value of the underlying index increases for extended periods, or where the exchange rate of the underlying index denominated in a currency other than the inverse product's base currency rises for an extended period, inverse products can lose most or all of their value.
Investing in inverse products is different from taking a short position. Because of rebalancing, the performance of inverse products may deviate from a short position in particular in a volatile market with frequent directional swings.
The worst case is that you will lose the entire principal amount.
When L&I Products are held overnight, their return may deviate from and may be uncorrelated to the multiple (in the case of leveraged products) or the opposite (in the case of inverse products) of the return of the underlying index.
This product is not principal protected.
L&I Products must be terminated when all the market makers resign. Termination of the L&I Product should take place at about the same time when the resignation of the last market maker becomes effective.
You can buy and sell L&I Products through the licensed intermediaries (brokers and banks).
The product is a complex product and investors should exercise caution in relation to the product.
In the worst case scenario (e.g. insolvency of issuer), the investor may get nothing back and the potential maximum loss could be 100% of investment amount.
If the offering documents provided by the issuer have not been reviewed by the SFC; investors are advised to exercise caution in relation to the offer.
SFC authorization does not imply official recommendation or endorsement of a product nor does it guarantee the commercial merits of a product or its performance.
The product is available for professional investors / non- professional investors.
The above information is provided for reference only. The information may not contain all material terms, in and of itself should not form the basis for any investment decision. Potential investors must seek their own independent advice in relation to any legal, tax, accounting or regulatory issues relating to the matters discussed herein, By accepting receipt of this information the reader will be deemed to represent that they posses, either individually or through their advisor, sufficient investment expertise to understand the risks involved in any purchase or sale of any investment products, referenced herein, and investor has made its own independent judgment. The value, price or income from investments may fall as well as rise.