Variation in L&I ETF volumes in HK raises questions

Certain leveraged and inverse exchange-traded funds newly listed in Hong Kong are being traded far more heavily than others, which has led some to question the source of demand.
Variation in L&I ETF volumes in HK raises questions

Some of Hong Kong's new leveraged and inverse (L&I) exchange-traded funds are recording soaring trading volumes within just two months of listing, raising questions as to whether they are being driven by genuine and sustainable investor demand.

The products launched by Chinese asset managers in particular have racked up impressive turnover (see table below), despite concerns being raised by some about L&I products.

The objective of a leveraged fund is to multiply the return of the underlying index. As they are designed to be held for short periods, turnover is as important as assets under management as a measure of a fund’s success.

Four fund promoters – two Chinese (CSOP Asset Management and China Asset Management) and two Korean (Mirae Asset and Samsung Asset Management) – listed HSI and HSCEI funds on March 14. They have seen big differences in trading activity, with CSOP emerging as the clear market leader, taking 54% of total turnover on one product (inverse HSI exposure), for example.

Between March 14 and May 17 the average turnover of CSOP’s L&I products combined has been way out in front, with around HK$295 million ($38 million) per day, according to Bloomberg.

China AMC and Mirae Asset are fairly evenly matched on daily average turnover total, with the former posting HK$140 million and the latter HK$147 million. But Samsung AM, which received the first authorisations for such products in Hong Kong, is averaging just HK$24 million and E Fund HK$7 million on its one product.

Peter Lee, head of global strategy for the ETF and index team at Samsung AM in Seoul, voiced scepticism at how high some of the trading volumes were, especially so soon after launch. He suggested it may not all be “real buying” and that some promoters and their market-makers may have been “over zealous” in giving the appearance of plentiful intra-day liquidity.

“I have to wonder if all the volume you see, is it real demand in the market, is this all real buying?” Lee said. “I think gradually yes, it will come, but in the early stages of any market, I think it’s unheard of to see these kind of trading volumes.”

L&I ETF turnover in Hong Kong, March 14 to 17, 2017
Product name Average Daily Turnover (HK$) AUM (US$)
CSOP HSI 2x LP 103,814,652 51,391,999
CSOP HSI -1X IP 50,899,034 46,822,195
CSOP HSHSCEI 2X LP 98,751,156 33,259,356
CSOP HSCEI -1x 41,397,512 63,473,550
China AMC HSI 2X 49,601,101 52,881,163
China AMC HSI -1X 18,724,016 41,432,775
China AMC HSCE 2X 48,763,831 37,450,065
China AMC HSCE -1 23,529,647 51,290,323
Samsung HSI 2X 6,129,623 21,979,354
Samsung HSI -1X 4,752,740 21,870,968
Samsung HSCEI 2X 8,276,435 25,420,644
Samsung HSCEI -1 5,385,137 19,841,033
Mirae HSI 2x IP 57,033,336 29,988,128
Mirae HSI -1X IP 11,935,964 13,664,516
Mirae HSCE 2X 63,756,837 12,496,774
Mirae HSCE -1X 14,868,606 24,482,321
E Fund HSI -1X* 7,760,627 16,412,903

*Data starts from March 20 (all other ETFs launched on March 14)
Source: Bloomberg

AsianInvestor asked ETF providers for comment on the high turnover. US-based Direxion and China AMC (as joint promoters) declined to comment. Alvin Li, chief ETF strategist at CSOP Asset Management, said the higher turnover in its case was down to superior marketing and having strong backing from market-makers. 

Others suggested the activity of local market-makers was the key factor, and one Hong Kong-based executive at an ETF provider told AsianInvestor: "I have heard there is a healthy incentive for turnover for certain market-makers."

But Li said CSOP provides no incentives to its market-makers. "We have committed to providing a good market for investors at launch. On the listing day, right from the open we had three market-makers quoting on our funds [they have six in all]."

He claimed this made CSOP more ready than its rivals on this front, adding: "This was certainly a factor [in its products' high volumes]."

Moreover, it is beneficial for market-makers to back a successful product, Li said. “They have to believe the product will become successful, so they are willing to quote more actively in the early stages and provide liquidity to make the product popular.

"Once that happens, the product will enter a self-sustaining stage where other participants will keep trading the products," noted Li. "This is when the market-makers will reap the rewards.”

A Hong Kong-based market-maker for L&I ETFs told AsianInvestor that “considering the regulations and what banks are told to do, and not to do on screen”, he thought it was unlikely market-makers were doing anything untoward.

ETF trading desk heads at JP Morgan, Merrill Lynch and Morgan Stanley declined to comment.

If there is false trading and a deliberate intent to create an inaccurate picture of trading volumes, this can constitute a breach of the market conduct provisions of Hong Kong's Securities and Futures Ordinance, a Hong Kong-based lawyer told AsianInvestor.

This article has been updated to reflect the fact AsianInvestor failed to successfully contact Mirae Asset Management for comment. 

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