Investors in Asia have not only been hurt by the growing risk aversion caused by Lehman BrotherÆs filing of bankruptcy. There are also those who have been affected directly through their exposure to Lehman structured products, particularly in Greater China.

In China, investors in Hua An Fund ManagementÆs overseas investment fund are affected because its structured notes are guaranteed by a unit of Lehman. The fund is co-advised by LehmanÆs asset management unit in Asia. Launched in 2006, the fund was the first to receive qualified domestic institutional investor (QDII) approval from the China Securities Regulatory Commission. QDII allows select institutional investors in China to invest overseas.

The Hua An QDII fund raises assets in China and invests the proceeds into guaranteed notes issued by a Lehman special purpose vehicle (SPV) named Lehman Brothers Special Financing. In turn, the vehicle receives a 100% guarantee provided by Lehman Brothers Finance. ICBC and HSBC Securities Services are the fundÆs domestic and overseas custodians, respectively.

Under a complex structure, the SPV invests the proceeds passed on by Hua An into seven mutual funds managed by LehmanÆs asset management arm. These include the Lehman Brothers Anti-Benchmark Euro Equity Fund, Lehman Brothers Alpha Fund û Global Value Fund, Lehman Brothers Alpha Fund û Straus US Equity Fund, Lehman Brothers Global Bond Fund (Offshore), Lehman USD Liquidity Fund and the Strategic Commodities Fund.

The question at the front of Chinese investors' minds is whether Lehman Brothers Finance and Lehman Brothers Special Financing are about to fall into bankruptcy administration. That would void LehmanÆs guarantee and destroy the solvency of the QDII fund.

The official statement from the firm notes that Lehman Brothers International (Europe), Lehman Brothers Holdings, Lehman Brothers Limited and LB UK RE Holdings have concluded that, in the absence of ongoing financial support from the ultimate parent company, they are or are likely to become unable to pay their debts as they fall due and accordingly have taken steps to place those companies into administration.

The London derivatives clearing house LCH Clearnet had already declared the notes' processor Lehman Brothers International (Europe) and the issuer Lehman Brothers Special Financing 'defaulters' on September 15.

Hua An says it will be unable to perform its redemption duties if the two Lehman subsidiaries û one as the issuer and the other as guarantor û proceed into bankruptcy administration. Its spokesman in Shanghai says he does not know the seniority of the paper the SPV holds, and in the event of bankruptcy recovery, Hua An might not be able to recover the value of these assets.

Unlike an earlier QDII product structured by UBS for Minsheng Bank, which collapsed in March, any trigger clause in Hua AnÆs product will be irrelevant if the insolvency at LehmanÆs parent level spreads down to its SPVs and holdings in Asia. Investors may not recover their investments if the seniority of their holdings ranks below those of other creditors with subordinated holdings.

Brad Okita, managing director for Asia at Lehman Brothers Asset Management and one of the original architects of the QDII fund, says the asset management unit will remain in business and continue to provide asset management services to its clients. However, since the Hua An QDII has been sold through private placement, he cannot comment on the SPVÆs status under trade and associated confidentiality terms.

According to Hua AnÆs QDII fund report for the first half of 2008, the guarantee is backed by Rmb97 million ($14.2 billion) in assets û made up of Rmb784,946 in cash ($124,594), with another Rmb96 million ($14.1 million) in a Lehman Global Multi Strategy Fund and zero coupon swaps. As of June 30, the fundÆs total assets stood at Rmb97.77 million ($14.3 million).

Market sources point out that in the event that the Hua An QDII fund becomes insolvent, two statements from the June 30 fund report could be used as the basis for lawsuits by disgruntled investors.

One of the statements on credit risks says ôthe potential for default of this products will be lowö because all transactions on structured notes are processed by Lehman Brothers International (Europe), which is a fully owned subsidiary of Lehman Brothers, which is a leading global financial institution. Another statement relates to the validity of the 100% guarantee provided by Lehman Brothers Finance.

As one of the original 10 pioneering fund houses in China, Hua An has been lauded as an innovator in the market. Back in 2001, it was the first to issue an open-ended fund, which nearly caused a riot when it was launched because of the many investors who lined up to subscribe in Guangzhou. That fund attracted Rmb50 billion ($7.1 billion) on its first day of subscription.

In Hong Kong, Lehman Brothers Asia has suspended the provision of secondary market quotes or liquidity for Lehman BrothersÆ unlisted structured products pending further announcements. Hong KongÆs Securities & Futures Commission says it has been in touch with the trustee group that holds the underlying assets of these products to obtain confirmation that the assets are properly ôring fencedö or protected and that the trustees are acting in the best interests of the investors of such products.

In Taiwan, the Financial Supervisory Commission estimates the island's outstanding exposure to Lehman Brothers structured products at about NT$80 billion ($2.49 billion). The FSC urges investors to remain calm until there is further news about Lehman Brothers' structured products trades in Asia.