Hong Kong is expected to see its first leveraged and inverse exchange-traded funds listed next month – much earlier than previous expectations – and Chinese and Korean managers are thought to be likely first movers. 

This will come as welcome boost for asset managers, after concerns had been voiced that Hong Kong was lagging as a regional ETF hub and potentially being overtaken by other jursidictions. 

Several clients of law firm Simmons & Simmons have expressed interest in L&I ETFs and a few are at an advanced stage in the approval process, with go-ahead expected next month, said a partner at the firm.

Samsung Asset Management is near the front of the queue and Peter Lee, head of global strategy for ETF’s at Samsung told AsianInvestor: “It’s no secret that ourselves, Mirae, CSOP and others are interested in having our funds approved. [Hong Kong manager] EIP is also interested and [mainland house] China Asset Management is working with [US ETF provider] Direxion on new funds.”

Lee said Samsung will be introducing a regional Asia product and expects rival firms to offer regional and global funds initially, then country-focused funds. “Once we have a few of these products in the market, I expect you will see funds offering exposure to North America, Japan, Korea, Southeast Asia, even India.” 

He said Samsung hoped to build out its L&I product range in Hong Kong with fixed income, commodities, thematic and smart-beta products.

Leveraged ETFs use derivatives to boost index returns over a short period, typically one day, and are not designed for use over an extended period. Inverse ETFs do the same for investors who want to short-sell an index.

Like most observers, Lee does not expect the market to really take off until Hong Kong’s Securities and Futures Commission (SFC) opens the authorisation process to funds linked to Hong Kong and eventually Chinese indices. 

The products will be introduced in two phases in Hong Kong to allow investors time to familiarise themselves with them and to allow the SFC to monitor their potential impact.

In the first phase, the regulator is only willing to look at indices excluding Hong Kong and China, so initial products are likely to reference major benchmarks such as MSCI World, S&P 500, Nasdaq 100, FTSE 100 or Nikkei 225.

Hence an L&I market including local indices is still some way off. Phase two will not start until the SFC has conducted a review six months after the launch of the initial batch, to consider including Hong Kong equity indices.

“The market is expecting Hong Kong products, so nobody is concerned that the SFC will not allow them, and obviously there’s a natural home bias,” said Lee.

He added that being a first mover would hopefully work in favour of Samsung and the other early players, when it came to partnering with index providers and gaining regulatory approval in the second stage.  

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AsianInvestor will host its Asia ETF Summit tomorrow (May 24) at the Ritz-Carlton hotel in Hong Kong. The conference will bring together an audience of asset owners and wealth managers to discuss the latest innovations and different uses for ETFs as investment tools. The summit is part of AIWeek, our flagship event that annually brings together some 400 of Asia's leading investment executives.

For further details please contact Alastair Hills, head of conferences on alastair.hills@haymarket.asia
or +852 3175 1986.