HSBC has reached a deal with 11 third parties to distribute a structured fund aimed at exploiting the volatility of the Hang Seng China Enterprises Index. The H-Share Index Absolute Return Capital Guaranteed Fund is a three-year term, 100% capital protected vehicle, with 100% participation in the average quarterly percentage fluctuation (+/-) in the underlying index.

Among the distributors for the new fund are HSBC itself and Bank of America as well as institutions including Hang Seng Bank, ICBC (Asia) and Bank of Communications (Hong Kong). The closed-ended fund has a minimum investment of $3,000 with a front-end load of 3.45% incorporated in the initial allocation, and is open from 23 October to 24 November.

Frank Turley, head of wealth management sales in Asia Pacific for global markets at HSBC in Hong Kong, points out that the H-Share Index, which is market capitalisation-weighted to state-owned Chinese companies listed on the Hong Kong Stock Exchange, has proved to be one of the most volatile indices in the region. ôBuying an index fund is terrific as long as the market keeps rising,ö he adds. ôBut unlike with an index-tracking fund, this new fund offers a chance to profit in a bear and a bull market.ö

If the volatility HSBC is banking on is absent from the H-share market, and the index has not changed at any of the 12 quarterly observation points, investors will receive a guaranteed 6% return on their investment. A kick-out will occur if, on any 12-month anniversary of the fund start date including the final date of its three-year term, the index is at or more than 30% below its initial starting level. In such an event, the fund will cease and investors will be returned 105% of their initial investment.

In a best-case scenario - provided by HSBC in the fund fact sheet - the index has seven positive quarters, five negative quarters and one static quarter. This leads to an average percentage change, quarter-on-quarter, of 24%, and a return for the investor of the same.

In a separate development, HSBC has outsourced the management of its synthetic collateralised debt obligation to Singapore-based Lion Capital. The six-year, A$70 million note will be moved from the static portfolio put in place at launch in November last year to an active allocation strategy.

The Strategic Assets Repackaged Trust is the reference portfolio that can be used as the basis for linked funds and structures for HSBCÆs investors. It is synthetically linked to the debt of some 100 global companies.

Jamie Spence, head of marketing for structured products at HSBC in Hong Kong, says the transfer was made to maintain the synthetic CDOÆs objective of attractive capital returns and stable ratings. He adds that Lion Capital was one of the few companies in Asia able to achieve these objectives and, because it is based in the region, gives HSBC clients real-time access to the portfolio.