Investment

Leveraged and inverse products (L&I Products) are derivative products structured as funds, and their shares/units are traded on The Stock Exchange of Hong Kong Limited (SEHK).

Unlike traditional index tracking exchange traded funds (ETF), L&I Products are often referred to as "daily" products since they aim to deliver a multiple of or a multiple of the opposite of the return of the underlying index on a daily basis only. Leveraged products seek to deliver a daily return equivalent to a multiple of the underlying index return. For example, when an investor buys a two-time leveraged product, and the underlying index moves up by 10% on a given day, the two-time leveraged product should deliver a gain of 20% on that day. While inverse products seek to deliver a daily return that is a multiple of the inverse underlying index return. For example, when an investor buys a two-time inverse product, and the underlying index moves up by 10% on a given day, the inverse product should deliver a loss of 20% on that day.

When L&I Products are held overnight, their return may deviate from and may be uncorrelated to the multiple of the returns of the underlying index.

L&I Products are different from conventional exchange traded funds. Here are the distinctive product features:

• Leverage factor: 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 two times (-2x), i.e. deliver a daily return equivalent to two times the inverse of the underlying index return.
• Daily rebalancing: 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.

(Source: Investor and Financial Education Council – the Chin Family)