Enhanced Investment Products (EIP) has expressed confidence it can make a success of its forthcoming launch of swaps-based synthetic ETFs on Hong Kong’s stock exchange.
The locally domiciled asset manager is set to list its first exchange-traded funds globally on February 16 on the city’s bourse after receiving hard-won authorisation from the Securities and Futures Commission (SFC).
EIP is due to stage a press conference the day before launch to offer details on its product suite, which it generalises will provide investors access to single country indices in emerging Asia.
Paul So, head of beta products at EIP, admits the firm is drip-feeding information purposely as a marketing ploy. “We want to provide information gradually because we want to attract more attention around launch time,” he notes. “There is no other constraint besides our marketing strategy. We don’t want to spoil the surprise.”
He says the firm believes in alpha and beta separation and adds it has been offering active and index investments to institutional investors for a decade – it celebrates its 10th anniversary this year. “These ETFs are just an extension of our index product offering in ETF format,” he states.
But synthetic replication has proved controversial owing to the potential for counterparty risk, and last September tighter collateral rules were introduced, making them potentially trickier and more costly to manage. (See AsianInvestor magazine, October 2011, pages 34-35.)
Further, it would also be fair to say that Hong Kong’s securities regulator has been more reluctant than its counterpart in Singapore to approve synthetic products.
Only recently Lyxor, part of French bank Société Générale and formerly the third biggest ETF provider in Hong Kong by number of products, moved to delist all 12 of its ETFs in the city.
It is understood Lyxor did not achieve sufficient volume in its products, all of which were synthetic, to make running them cost-effective – a development first revealed by AsianInvestor. Regulatory tightening also ensured it was near-impossible to launch new swaps-based products.
Asked how EIP planned to prosper in this market given headwinds, So replies: “We believe we have the knowledge and understanding of ETF ingredients, whether synthetic or physical.
“There are ingredients in our offerings that will hopefully draw the demand of end-investors. I would not say that success or failure depends on whether the products are synthetic or not. Other factors come into play.”
Having joined EIP in May 2010, So took over some of the duties of Stewart Aldcroft, who moved to Citi’s global transaction services division last August. The latter is believed to have become frustrated by the length of time it was taking the SFC to approve swaps-based ETFs. EIP also hired Rui Tang last September as its head of business development.
Simple maths indicates the SFC will have taken about 18 months to approve EIP’s new suite of swaps-based ETFs, and although he will not confirm the timeframe, So admits it has been a long process.
During this period, he points out, the SFC has been proactive in issuing guidelines on investor protection relating to collateral and counterparty exposure as well as information dissemination in order to differentiate between ETF products.
It is a process he suggests was worth taking time to get right, adding that the regulator had to be completely happy EIP was compliant before granting authorisation for its ETFs.
“With the current regulatory environment a synthetic ETF requires at least 100% assets backing it, which in itself means it has no counterparty risk on a continuous basis,” he notes. “There is sufficient investor protection for ETF products going forwards.”
In fact, So does not seem unduly concerned about issues of market timing, saying: “Each product takes time for investors to adopt. There are cases where they get the right product at the right time, and you need market conditions to help at the same time.
“But it is out of the control of issuers to market-time a product. We believe investors just need to have more options, and in Hong Kong, emerging Asian markets are familiar to investors.”
He adds that EIP will target all investor channels with its products to promote liquidity, including retail, high-net-worth and asset managers either directly or through intermediaries.
“We want to offer low-cost, robust products with a good balance of tracking risk and counterparty risk, which should help to promote liquidity in these products,” he says, adding that EIP already has a pipeline of future products in mind further revolving around emerging markets.