Macquarie Bank, a large player in equity derivatives for institutional clients, is now offering equity-linked investments (ELIs) to Hong Kong's retail market, says Matthew Long, associate director of equity derivatives sales.

The bank estimates the institutional market in Hong Kong saw HK$48 billion in premiums written over the past 12 months. With interest rates very low (2% for retail bank depositors) and the economy struggling, investors are looking for alternative sources of yield. In markets such as Macquarie's home in Australia as well as the US, retail does have access to similar products, and now Hong Kong's Securities and Futures Commission has authorized Macquarie's ELI product.

Long says ELIs do differ from the standard institutional product, which he terms equity-linked notes (ELNs), which are classified as debentures and fall under the Companies Ordinance, which means they can only be sold to professional investors. The Macquarie structure is not a debenture so is available to any 'experienced' investor that gets a signature of approval from a recognized financial advisor, broker or retail bank.

Hong Kong's retail banks have already been getting in the act over the past 18 months. Several have issued equity-linked deposits (ELDs) which have similar payoff structures as ELNs. Banks pitch these only to their more sophisticated and wealthy customers and tend to charge a minimum investment of up to HK$500,000. But ELDs remain limited because they can only be sold as private placements.

Macquarie will have a minimum investment size of only HK$100,000, and will distribute ELIs via banks, financial advisors and brokers. It also plans an advertizing campaign. Equities derivatives are manufactured and issued every week based on most Hong Kong listed shares and come with a 90-day duration. Upon maturity, if the share price is above the strike price, the investor gets the nominal value; if the share price is under water, the investor ends up with actual ownership of the shares instead of cash. Investors must be made aware by distributors of this distinction, Long says.