Understanding Leveraged and Inverse Products

Getting to know Leveraged and Inverse Products

Advantages of Leverage and Inverse Products
  • Simplicity
    Listed and traded on the SEHK like stocks.
  • Transparency
    Transparent pricing through NAV calculation
  • Amplify Returns
    With leveraged products, index return is easily amplified
  • Hedge against Losses
    Hedging with inverse product can return a more defensive portfolio & increase investment profits
Understanding Leverage and Inverse Products
What are leveraged products?

What is the 2X Leveraged Product?

Leveraged product doubles the return in bull market
(before fees and expenses)

What are Inverse Product?

What is the -1X Inverse Product?

Inverse product provides return in bear market
(before fees and expenses)

Common L&I Products Trading Strategy
Bullish: Amplifying Returns with Leverage Products
HK stocks recorded trillions of turnover in February
HSI Index rallied 2033 pts in half a month

Do you want to earn even more returns when the market is in a major rally?

Leverage products can amplify your investment returns during market rally

Data Source: Bloomberg, as of 21st Feb 2017. HSI performance represented by HSI index, and the HSI 2X performance represented by HSI leveraged index

With leveraged products, index return is easily amplified
Neutral: predict market movements using historical data
  • Leverage means a rise in price at day close, while inverse means a drop in price at day close
  • Statistically speaking, there is a higher chance in having inverse signs in the future if leverage signs appeared consistently in the past few days.
  • The look-back period can be extended to a month, a quarter or a year to help predict next day’s short-term trends.
Statistics
Bearish: Use inverse product as hedging tool
HSI dropped over 1200 points on June 24th, when UK voted for Brexit.

Did you hedge your investment portfolio?

Your investment will be more defensive if you hedged your positions over BREXIT, and the investment return under unfavorable environment will be increased:

Data Source: Bloomberg, as of 4 July 2016. HSI Portfolio is represented by 2800 market price, inverse product is represented by HSI Short Index.

Hedge with inverse product can return a more defensive portfolio & increase investment profits
Advanced L&I Products Trading Strategy
Bullish: Trend Trading with Leveraged Products

Trend Trading (Percentage Increase)

  • Because leverage and inverse products have simple structure, it is very suitable for intra-day trading and for investors to achieve above average returns or to hedge their positions.
  • 2016 was a suitable year to use trend trading on HSI Index when HSI Index increase more than 1% in one single day. If the (2X) leveraged product was bought and held for 5 days in 2016 the annual return with this simple strategy would be 33.7%.

2016 Cumulative Performance Comparison

Data Source: Bloomberg, CSOP as of Dec 31st 2016, strategy performance is back tested with the index by trading 24 times in 2016, excluding trading fees and management fees.

Trend Analysis
Bearish: Hedged Portfolio with Inverse Products

Portfolio Hedging

  • Inverse product can be used for portfolio hedging purposes
  • Assuming you bought and held Tencent for a while and you think the market has reached the top. You should buy inverse product as a hedging tool instead of selling a high-quality stock like Tencent because a repurchase would be difficult if you bet on the wrong direction as Tencent continues to soar.
  • Another example with inverse product trading strategy. As of 2016, if the HSI Index increase more than 1.5% or around three to four hundred points in one single day, and indicates a potential correction in near future, a simple strategy of holding (-1X) inverse product for 2 days would generate a 15.2% annual return in 2016.
  • Additionally, there is no stamp duty charged on trading inverse products. For investors who buy inverse product to hedge their positions instead of selling the stocks, they can save additional 2.6% stamp duty cost.

2016 Cumulative performance Comparison

Data Source: Bloomberg and CSOP, as of 31 December 2016. * Performance back tested with index returns. This hedging strategy requires 13 transactions in 2016 excluding trading fees and management fees.

Trend analysis
Neutral: Moving Average Strategy with Leverage and Inverse Products

Trend Trading (Moving Average)

  • Besides simple trading strategy using percentage increase, assuming we bought and held (2X) leveraged product for 10 days whenever the 30-day moving average rises through 60-day moving average and bought and held the (-1X) inverse product whenever the 30-day moving average falls through 60-day moving. This simple strategy would yield a 25.9% annual returns in 2016.

2016 Cumulative Performance Comparison

Source: Bloomberg, CSOP, as of 31 December, 2016. Performance back tested with index returns. This strategy requires 4 transactions in 2016 excluding trading fees and management fees.

 

 

Trend analysis
Risks

Investors should read the funds’ offering documents and product key fact statements for further details including the risk factors.

Risks Associated with Derivative Instruments

CSOP Leveraged and Inverse Products are exchange traded products which invests directly in futures contracts to give leveraged or inverse daily returns. As price movements between index futures and Hang Seng Index (spot) are not always aligned, when the future price is higher than spot price (premium), or lower than spot price (discount), the tracking performance of the product will be affected.

Effects Associated with Ex-dividend

Dividend distribution of the index constituents might affect futures’ return. The futures bid ask price would be lower than the index spot price to reflect the effects of ex-dividend date. However, price movements of the index on payment date would not affect price movements of leveraged and inverse products.

Leverage Effect

L&I products provides daily 2X and -1X returns, the leverage and inverse effect will deviate when holding period is long

Scenario 1: Higher Accumulative Gain

When the index is trending up, leveraged products increase more than 2 times returns relative to the index (Outperformance)

  Index Daily Return Daily 2x Product Daily Return
Day 1 100.0   100.0  
Day 2 103.0 3% 106.0 6%
Day 3 108.2 5% 116.6 10%
Day 4 107.1 -1% 114.3 -2%
Day 5 114.4 4% 123.4 8%
Total Return   11.4%   23.4%
Scenario 2: Lower Accumulated Loss

When the index is trending down, leveraged products fall less than 2 times relative to the index (outperformance)

  Index Daily Return Daily 2x Product Daily Return
Day 1 100.0   100.0  
Day 2 97.0 -3% 94.0 -6%
Day 3 93.1 -4% 86.5 -8%
Day 4 94.1 1% 88.2 2%
Day 5 89.3 -5% 79.4 -10%
Total Return   -10.7%   -20.6%
Scenario 3: Underperformance

When the index is fluctuating, leveraged Products deliver less than 2 times returns relative to the index (Underperformance)

  Index Daily Return Daily 2x Product Daily Return
Day 1 100.0   100.0  
Day 2 105.0 5% 110.0 10%
Day 3 99.8 -5% 99.0 -10%
Day 4 104.7 5% 108.9 10%
Day 5 99.5 -5% 98.0 -10%
Total Return   -0.5%   -2.0%

 

Historical Data