INVESTOR EDUCATION

Investor Education

Warrants

Warrants are an instrument which gives investors the right - but not the obligation - to buy or sell the underlying asset at a pre-set price on or before a specified date. There are two main types of warrants: equity warrants and derivative warrants, which are subject to different provisions of the Listing Rules in Hong Kong.

Equity warrants

Issued by a listed company and give holders the right to subscribe for equity securities of the issuer. Equity warrants are often issued together with new shares in IPOs, or distributed together with the shares acquired for any dividend payment, bonus issue or rights issue. Equity warrants have a life of one to five years. Upon exercise, the listed company will issue new shares to their holders and collect extra capital. The issuer of a warrant must specify whether it is settled by cash or by physical delivery of the underlying assets.

Derivative warrants

Issued by a third party, generally an investment bank, independent of the issuer of the underlying assets. They have a life of six months to five years. The underlying assets of derivative warrants include ordinary shares, market indices, currencies and baskets of shares. The issuer of derivative warrants may not be the issuer of the underlying assets but should hold or have a right to hold the underlying assets. The right conferred by a derivative warrant may be the right to buy (call warrant) or the right to sell (put warrant).

Derivative warrants can be linked to a single security or a basket of securities, stock indices, currencies, commodities or futures contracts (like crude oil futures). Almost all derivative warrants currently traded in Hong Kong are cash-settled. When a physically settled call derivative warrant on a single stock is exercised, the warrant holder will receive the underlying stock from the issuer. Unlike equity warrants, no new shares will be issued. Furthermore, every derivative warrant has a designated liquidity provider to help improve the liquidity of the instrument in the market.

The price of a derivative warrant at expiry mainly rests with the price of the underlying assets. However, so long as a derivative warrant remains valid, its price will be affected by other factors in addition to the underlying assets’ price. They include the volatility of the underlying assets’ price, the exercise price, the time remaining to expiry, interest rates and expected dividend payments on the underlying assets, etc. Like other securities, the price of a derivative warrant may also be affected the supply of and demand for the derivative warrant itself.

Since derivative warrants can have great product variety, large warrant markets in the world are usually mainly derivative warrant markets. The equity warrant markets are usually of a much smaller scale.

Attributes

Warrants have following attributes which include:

Issuer: A warrant can be issued by a listed company (i.e. subscription warrant) or a third party such as a financial institution (i.e. derivative warrant).
Underlying asset: It can be a single stock, a basket of stocks, an index, a currency, a commodity, a futures contract (e.g. oil futures) etc.
Types of rights: Don't mix up a call warrant with a put warrant. A call warrant gives you the right to buy whereas a put warrant gives you the right to sell the underlying asset.
Exercise price: The price at which you buy or sell the underlying asset in exercising a warrant.
Conversion ratio: This refers to the number of units of the underlying asset exchanged when exercising a unit of a warrant. Normally, in Hong Kong a derivative warrant on shares has the ratio of 1 (i.e.one warrant for one share) or 10 (i.e.10 warrants for one share).
Expiry date: The date on which a warrant will expire and become worthless if the warrant is not exercised.
Exercise style: With an American warrant, you can exercise to buy/sell the underlying asset on or before the expiry date. Whereas a European warrant allows exercise on the expiry date only.
Settlement: A warrant can be settled by cash or physical delivery upon exercise.
Trading policy: Derivative warrants are traded on the Exchange during trading hours in board lot multiples settled on T+2 (T being the transaction day).

Risk disclosure

Derivative warrant trading involves high risks and is not suitable for every investor. Investor should understand and consider the following risks before trading in derivative warrants.

Issuer risk: Derivative warrant holders are unsecured creditors of the issuer and they have no preferential claim to any assets an issuer may hold.
Gearing risk: Although derivative warrants often cost less than the price of the underlying assets, a derivative warrant may change in value to a much greater extent than the underlying assets. Although potential return on derivative warrants may be higher than that on the underlying assets, it should be noted that in the worst case the value of derivative warrants may fall to zero and holders may lose their entire investment amount.
Limited life: Unlike stocks, derivative warrants have an expiry date and therefore a limited life. Unless the derivative warrants are in-the-money, they become worthless at expiration.
Time decay: So long as other factors remain unchanged, the value of derivative warrants will decrease over time. Therefore, derivative warrants should never be viewed as products that are bought and held as long term investments.
Market forces: In addition to the basic factors that determine the theoretical price of a derivative warrant, derivative warrant prices are also affected by the demand for and supply of the derivative warrants. This is particularly the case when a derivative warrant issue is almost sold out and when there are further issues of an existing derivative warrant.
Turnover: High turnover should not be regarded as an indication that a derivative warrant’s price will go up. The price of a derivative warrant is affected by a number of factors in addition to market forces, such as the price of the underlying assets and its volatility, the time remaining to expiry, interest rates and the expected dividend on the underlying assets.

For the basic knowledge and trading mechanism of warrants, please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at "www.ifec.org.hk" when referring to information using this link.

Callable Bull/Bear Contract (CBBC)

A Callable Bull/Bear Contract (CBBC) is an instrument that tracks the performance of an underlying asset. The trading price of a CBBC tends to mirror the movement in the price of its underlying asset. Like warrants, CBBCs can be issued over a range of eligible underlying assets prescribed by the Exchange from time to time.

A CBBC can be issued as a bull contract or a bear contract:

(a) A "bull" CBBC may be invested in by an investor who holds a view that the price of the underlying asset will increase during the term of the CBBC.

(b) A "bear" CBBC may be invested in by an investor who holds a view that the price of the underlying asset will decrease during the term of the CBBC.

Features of CBBCs:

CBBC price moves tend to track the price moves of the underlying assets closely:

The price of a CBBC tends to follow closely the price of the underlying assets (ie delta close to one).Thus, if the underlying assets increase in value, a Bull CBBC with entitlement ratio of 1 to 1 generally increases in value by approximately the same amount, whereas a Bear CBBC with entitlement ratio of 1 to 1 generally decreases in value by approximately the same amount. Due to this property, CBBC issuers offer investors a product which tracks the price movement of the underlying assets more closely and with higher price transparency than some other structured products. However, when the underlying assets of a CBBC are trading at a price close to its Call Price, the value of CBBC may become more volatile and the change in its value may be disproportionate to the change in the value of the underlying assets.

CBBC have a Call Price and a mandatory call feature:

For Bull contracts, the Call Price must be either equal to or above the strike price. For Bear contracts, the Call Price must be equal to or below the strike price. If the underlying assets’ price reaches the Call Price at any time prior to expiry, the CBBC will expire early. The issuer must then call the CBBC and trading of the CBBC will be terminated immediately. Such an event is referred to as a mandatory call event (“MCE”).

Category N CBBC and Category R CBBC:

Category R CBBC refers to a CBBC that has a "residual value" after the mandatory call event. When a Category R CBBC is called, its intrinsic value is generally above HKD0, and therefore it may have residual value to be distributed to its holders.

Category N CBBC refers to a CBBC that has "no residual value" after the mandatory call event, its call price and the exercise price are set at the same level.

Difference between CBBCS and Warrants:

Risk factors (Investors should take into account the following risk factors - among others)

Mandatory call:

A CBBC will be called by the issuer when the price of the underlying assets hits the Call Price, and that CBBC will expire early. The payoff for Category N CBBC is zero when they expire early. When Category R CBBC expire early the holder may receive a small residual value payment, but there may be no residual value payment in some situations. Dealers may charge their clients a service fee for the collection of the residual value payment from the respective issuers.

Limited life:

CBBCs have an expiry date and therefore a limited life. Unless the CBBCs are in-the-money, they become worthless when they expire.

Liquidity:

Although CBBC have liquidity providers, there is no guarantee that investors will be able to buy/sell CBBC at their target prices any time they wish.

Gearing effect:

Although warrants often cost less than the underlying assets, a warrant may change in value to a much greater extent than the underlying assets. In the worst case the value of CBBCs may fall to zero and holders may lose their entire investment amount.

Funding costs:

When a CBBC is called, the CBBC holders will lose the funding cost for the full period, since the funding cost is built into the CBBC price upfront at launch, even though the actual period of funding for the CBBC turns out to be shorter when there is an MCE. In any case, investors should note that the funding costs of a CBBC after launch may vary during its life and the liquidity provider is not obliged to provide a quote for the CBBC based on the theoretical calculation of the funding costs for that CBBC at launch.

For the basic knowledge and trading mechanism of Callable Bull/Bear Contract (CBBC), please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at "www.ifec.org.hk" when referring to information using this link.

Exchange Traded Funds (ETFs)

Introduction

Exchange Traded Funds (ETFs) are a rapidly growing investment product that has gained popularity worldwide. The number of ETFs listed on the HKEx (Hong Kong Exchange) currently stands over 170, and this number continues to increase.

Definition of ETFs

ETFs are open-end index funds that are listed and traded on exchanges similar to stocks. They can be bought and sold during regular trading hours through any broker on most trading platforms. Like index funds, ETFs consist of a collection of securities that are designed to track specific indexes.

Benefits of Using ETFs:

1. Diversification

ETFs inherently provide diversification as they track indices comprising a variety of securities. By investing in ETFs, you can gain exposure to entire countries or sectors while reducing risk associated with individual stocks.

2. Low Cost

Compared to comparable index or active mutual funds, ETFs often have lower fees and expense ratios. When trading ETFs, you only need to pay standard brokerage commissions and fees.

3. Liquidity

ETFs offer high liquidity, similar to the underlying basket of securities represented by their respective indexes. When the demand for an ETF increases in the secondary market, new shares are created and introduced into the market.

4. Transparency

ETFs generally provide transparency by disclosing the exact holdings of the fund on a regular basis, often daily. This means you always have up-to-date information about the securities in which you are invested. Additionally, ETFs offer cost transparency through upfront fee disclosure, ensuring that you are aware of the expenses associated with the investment.

Types of Exchange-Traded Funds (ETFs):

1. Cash-based ETFs:

- These ETFs hold the underlying securities of the index they track.

- They typically employ a full replication strategy, where they hold all securities within the index.

- In some cases, representative sampling or optimization strategies are used, where only a portion of the underlying securities are held.

2. Swap-based ETFs:

- Swap-based ETFs replicate the performance of an index using total return index swaps.

- They can provide exposure to markets that are not accessible through cash-based funds, such as commodities.

- However, there is some exposure to counterparty risk associated with swap-based ETFs.

Risks of Investing in ETFs:

Investing in ETFs carries certain risks, which investors should carefully consider. The following risks are associated with ETF investments:

1. Market Risk:

- ETF prices, like stocks, are subject to fluctuation due to various factors.

- Investors should be aware of the possibility of market volatility and its potential impact on ETF prices.

2. Tracking Error:

- Since ETFs are designed to replicate an index or benchmark, there is a chance that the returns earned by the ETF may differ from the index.

- This divergence, known as tracking error, can be positive (profitable) or negative (returns less than indicated by the index).

3. Foreign Exchange Risk:

- ETFs that invest in assets denominated in foreign currencies are exposed to currency rate fluctuations.

- Fluctuations in currency exchange rates can affect the value of the ETF's underlying assets and consequently impact the price of ETF shares.

Introduction of leveraged and inverse products

Leveraged and inverse products, also known as L&I Products, are structured as funds and fall under the category of derivative products. However, unlike traditional index tracking exchange traded funds (ETFs), L&I Products have a different approach. These products aim to provide a multiple or opposite return of the underlying index on a daily basis only. Leveraged products seek to achieve a daily return equivalent to a multiple of the index return. This means that if an investor purchases a two-time leveraged product, and the underlying index increases by 10% in a day, the product should deliver a gain of 20% on that day. On the other hand, inverse products aim to deliver the opposite daily return of the underlying index. For instance, when an investor buys a one-time inverse product and the underlying index moves up by 10% on a given day, the inverse product should deliver a loss of 10% on that day.

Major risks

Investment risk: The risk investment results of products are the opposite of traditional investment funds. If the product moves in an unfavorable direction, the product you invest in is likely to lose most or all of its value.
Leverage risk: The use of leverage will magnify both gains and losses of leveraged products resulting from changes in the underlying index or, where the underlying index is denominated in a currency other than the leveraged product's base currency, from fluctuations in exchange rates.
Passive investments risks: The Product is not “actively managed” and therefore the Manager will not have discretion to adapt to market changes when the Index moves in an unfavorable direction to the Product. In such circumstances the Product will also decrease in value.
Tracking error: Due to fees, expenses, transaction costs as well as costs of using financial derivatives, liquidity of the market and the investment strategy adopted by the Manager, the correlation between the performance of the Product and the Daily inverse performance of the Index may reduce.
Liquidity risk: Rebalancing typically takes place near the end of a trading day (shortly before the close of the underlying market) to minimize tracking difference. The short interval of rebalancing may expose L&I Products more to market volatility and higher liquidity risk.
Long-term holding risk: Leveraged and inverse products are not intended for holding longer than the rebalancing interval, typically one day. Daily rebalancing and the compounding effect will make the L&I Product's performance over a period longer than one day deviate in amount and possibly direction from the leveraged/inverse performance of the underlying index over the same period. The deviation becomes more pronounced in a volatile market.

As a result of daily rebalancing, the underlying index's volatility and the effects of compounding of each day's return over time, it is possible that the leveraged product will lose money over time while the underlying index increases or is flat. Likewise, it is possible that the inverse product will lose money over time while the underlying index decreases or is flat.

Risk of rebalancing activities: There is no assurance that L&I Products can rebalance their portfolios on a daily basis to achieve their investment objectives. Market disruption, regulatory restrictions or extreme market volatility may adversely affect the rebalancing activities.
Portfolio turnover risk: Daily rebalancing causes a higher levels of portfolio transaction when compared to conventional ETFs, and thus increases brokerage and other transaction costs.
Correlation risk: Fees, expenses, transactions cost as well as costs of using financial derivatives may reduce the correlation between the performance of the L&I Product and the leveraged/inverse performance of the underlying index on a daily basis.

For the basic knowledge and trading mechanism of Exchange Traded Funds (ETF), please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at "www.ifec.org.hk" when referring to information using this link.

Mutual Fund

The mutual fund is a type of collective trust fund that pools funds from multiple investors to purchase and manage various types of assets such as stocks, bonds, and other financial instruments. These funds are managed by professional fund managers who utilize their expertise to ensure that the funds are invested in the most profitable investment opportunities.

The operation of a mutual fund involves the pooling and diversification of funds from investors to spread the risks. This structure allows smaller investors to engage in diversified investments at a lower cost without directly purchasing a large volume of individual assets. Additionally, mutual funds provide a more manageable and supervised investment approach as investors' funds are concentrated in one fund and managed by a dedicated professional team.

When considering mutual funds, there are several key factors to consider. Firstly, we should focus on the fund's investment objectives and strategies. Different mutual funds may have diverse investment goals, such as pursuing long-term growth or stable income. These objectives are reflected in the fund's asset allocation and the selected investment instruments. Therefore, investors should carefully examine the fund's objectives and strategies to ensure they align with their investment needs and risk tolerance.

Secondly, costs are also an important factor for investors to consider. Mutual funds typically impose management fees and performance fees. The management fee is charged for the fund's management and operations, while the performance fee is based on the fund's performance. Investors should evaluate these costs to assess their reasonableness and alignment with expected returns.

Lastly, investors should acknowledge the existence of risks in mutual funds. Like any investment product, investing in mutual funds carries the risk of a decline in value. Factors such as the effectiveness of fund managers and market volatility can influence the fund's performance. Therefore, investors should conduct appropriate research on their investments and understand the risk characteristics of the funds.

In conclusion, mutual funds serve as an investment tool that provides convenient diversification for investors. However, investors should carefully examine the fund's objectives, costs, and risks to ensure they meet their investment needs. By undertaking this due diligence, investors can better harness the potential of mutual funds to achieve their financial goals.

The risks associated with mutual funds are as follows:

1. Market Risk: Reciprocal funds are subject to market fluctuations, and the performance of the funds involved can be affected by market conditions. If the market performs poorly or experiences significant volatility, the value of the reciprocal fund may decline.

2. Allocation Risk: The returns of reciprocal funds are adjusted based on the performance of other funds involved in the arrangement. If the performance of these funds is below expectations, it can impact the overall returns of the reciprocal fund.

3. Liquidity Risk: Reciprocal funds need to have sufficient liquidity to meet investor redemption requests. If there is a large influx of redemption requests that the fund is unable to meet promptly, it can result in delays or restrictions in redeeming funds.

4. Portfolio Positioning Risk: Reciprocal funds rely on the composition and performance of multiple funds to achieve investment objectives. If one or more of the funds in the arrangement underperform, it can affect the overall investment performance of the reciprocal fund.

5. Management Risk: The management of reciprocal funds requires expertise in making complex investment decisions and portfolio adjustments. Management risk includes factors such as the competence of the fund management company and potential errors in decision-making.

Investors should be aware of these risks when considering reciprocal funds and assess them based on their investment objectives, risk tolerance, and experience. It is advisable to seek professional advice from investment advisors to obtain comprehensive financial guidance and ensure a thorough understanding and acceptance of the associated investment risks.

For the basic knowledge and trading mechanism of Mutual Fund, please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at "www.ifec.org.hk" when referring to information using this link.

Hedge Funds

What is Hedge Fund?

No standard definition:

Ability to short the market, to leverage the portfolio to multiply gains, and to hold high concentrations of positions.
No industry-wide classifications of hedge fund strategies, each major industry group has its own classification system.

Distinct characteristics of hedge funds:

Key performance driver is manager skill rather than market returns.
Target consistent returns in the long term rather than outperformance of a benchmark index.
Managers are unrestricted in their choice of investment strategies.
The ability to invest in any asset class or instrument.

Attractions:

Expectation of strong returns (historical data).
Low correlations to traditional asset classes and ability to provide diversification.
Target absolute returns rather than relative return.

Difference Between Mutual Fund and Hedge Fund

Authorization – a mutual fund is usually authorized by authorties, and can be sold to an unlimited number of investors. Most hedge funds are not authorized and can only be sold to carefully defined sophisticated investors. Mutual funds may advertise freely; hedge funds may not.

Flexibility – the hedge fund manager has fewer constraints to deal with; he can sell short, use derivatives, and use leverage. The manager can also make significant changes to the strategy if he thinks it is appropriate. The mutual fund manager cannot be as flexible.

Liquidity – the mutual fund often offers daily liquidity (you can withdraw at any time); the hedge fund usually has some sort of “lockup” provision. You can only get your money periodically.

Absolute vs. Relative – the hedge fund aims for absolute return (it wants to produce positive returns regardless of what the market is doing); the mutual fund is usually managed relative to an index benchmark and is judged on its variance from that benchmark.

Self-Investment – the hedge fund manager is expected to put some of his own capital at risk in the strategy. The mutual fund does not face this same expectation.

Fees Paid to Hedge Fund

Hedge fund typically charge both a management fee and a performance fee.
Management fees are calculated as a percentage of the fund's net asset value and typically range from 1% to 4% per annum, with 2% being standard.
The performance fee is typically 20% of the fund's return during any year, though they range between 10% and 50%. Performance fees are intended to provide an incentive for a manager to generate profits.
Almost all hedge fund performance fees include a "high water mark" (or "loss carryforward provision"), which means that the performance fee only applies to net profits (i.e., profits after losses in previous years have been recovered).
Some performance fees include a "hurdle", so that a fee is only paid on the fund's performance in excess of a benchmark rate (e.g. LIBOR) or a fixed percentage. A hurdle is intended to ensure that a manager is only rewarded if the fund generates returns in excess of the returns that the investor would have received if they had invested their money elsewhere.
Some hedge funds charge a redemption fee (or withdrawal fee) for early withdrawals during a specified period of time (typically a year). The purpose of the fee is to discourage short-term investing, reduce turnover and deter withdrawals after periods of poor performance.

Side Pockets

A side pocket is a mechanism whereby a fund compartmentalizes assets that are relatively illiquid or difficult to value reliably. When an investment is side-pocketed, its value is calculated separately from the value of the fund’s main portfolio.
Because side pockets are used to hold illiquid investments, investors do not have the standard redemption rights with respect to the side pocket investment.
Profits or losses from the investment are allocated on a pro rata basis only to those who are investors at the time the investment is placed into the side pocket and are not shared with new investors.
Funds typically carry side pocket assets "at cost" for purposes of calculating management fees and reporting net asset values. This allows fund managers to avoid attempting a valuation of the underlying investments, which may not always have a readily available market value.
Side pockets allowed fund managers to lay away illiquid securities until market liquidity improved, a move that reduced losses. Despite these benefits, some investors complained that the practice was abused and not always transparent.

Types of Hedge Fund

Market Trend (Directional / Tactical) Strategies Hedge Funds
Event Driven Strategies Hedge Funds
Arbitrage Strategies Hedge Funds
Quant Funds

Hedge Fund Key Risk Factors

A Hedge Fund may employ a distinctive strategy which may not have a readily ascertainable comparative benchmark or index.
Hedge Fund documents are not reviewed or approved by regulators.
Hedge Funds may be leveraged (including highly leveraged) and a Hedge Fund performance may be volatile.
Hedge Funds may use benchmarks or targets for measurement purposes. There is no guarantee that a Hedge Funds’ goals, objectives, benchmarks or targeted returns will be achieved or reached.
Hedge Funds may have little or no operating history or performance and may use hypothetical or pro forma performance which may not reflect actual trading done by the manager or advisor and such history or performance should be reviewed carefully.
A Hedge Fund is not required to provide periodic pricing or valuation information to investors and it may be the Hedge Fund’s practice to not provide such information.
Some Hedge Funds may use a single advisor or employ a single strategy, which could mean a lack of diversification and higher risk.
An investment in a Hedge Fund may be illiquid and there may be significant restrictions on transferring interests in a Hedge Fund. There is no secondary market for an investor’s investment in a Hedge Fund and none is expected to develop.
A Hedge Fund’s fees and expenses, which may be substantial regardless of any positive return, will offset the Fund’s trading profits.
A Hedge Fund may involve a complex tax structure (which should be reviewed carefully) and delays in distributing important tax information.
A Hedge Fund may not provide any transparency regarding its underlying investments (including sub-funds in a Fund of Funds structure) to investors. In such a case, there will be no way for an investor to discover or monitor the specific investments made by the Hedge Fund or, in a Fund of Funds structure, to know whether the sub-fund investments are consistent with the Hedge Fund’s investment strategy or risk parameters.

For the basic knowledge and trading mechanism of Hedge Funds, please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at "www.ifec.org.hk" when referring to information using this link.

Actively Managed Certificates (AMC)

An actively managed certificate is a type of security that combines features of both traditional mutual funds and individual stocks. It is a structured product that provides investors with exposure to a portfolio of assets that is actively managed by a professional investment manager. The investment manager makes the decisions on which assets to hold, when to buy or sell them, and how much of each asset to hold in the portfolio.

Actively managed certificates may offer advantages such as professional investment management, diversification, and potentially higher returns compared to passively managed investments. However, they may also carry higher fees and expenses due to the active management involved.

Investors interested in actively managed certificates should carefully consider the investment objectives, risks, and fees associated with the product before investing. It is important to review the offering documents and understand the investment strategy and track record of the investment manager. Additionally, investors should assess whether the specific investment approach aligns with their own risk tolerance and investment goals.

Actively Managed Certificates (AMCs) are financial products that combine features of exchange-traded funds (ETFs) and actively managed mutual funds. While they can offer potential benefits such as professional management and the ability to outperform the market, there are also several risks associated with them:

Market Risk: Actively managed certificates are subject to market risks such as volatility, economic downturns, interest rate fluctuations, and geopolitical events. These risks can impact the fund's performance and investors' returns.
Issuer Risk: Investors may lose money if the issuer of the investment product encounters financial difficulties or defaults.
Liquidity Risk: Liquidity risk arises when it is difficult to buy or sell shares of an actively managed certificate, especially in times of market stress or in the case of a fund with limited assets under management. This can lead to wider bid-ask spreads and potential difficulties in exiting positions.
Higher Fees: Actively managed certificates typically have higher management fees compared to passively managed ETFs. These fees can erode returns over time, especially if the fund does not outperform its benchmark index.
Manager Risk: The success of actively managed certificates depends heavily on the skill and decision-making of the fund manager. If the manager makes poor investment decisions, it can negatively impact the performance of the fund.
Underperformance Risk: Despite the active management, there is a risk that the fund may underperform its benchmark index. If the fund fails to meet its investment objectives or strategic goals, investors may not receive the desired returns.
Lack of Transparency: Unlike ETFs, actively managed certificates may not disclose their holdings as frequently or as fully. This lack of transparency can make it difficult for investors to fully understand and evaluate the fund's investments.

Investors considering actively managed certificates should carefully assess these risks and consider their investment objectives, risk tolerance, and the fund's track record before investing. It's also advisable to consult with a financial advisor to align investment choices with overall financial goals.

Bond

Bonds, also known as public bonds or debt securities, are a type of valuable instrument issued by governments, institutions, or corporations. They represent a commitment to repay debt, whereby the issuer guarantees to pay interest and principal to bondholders according to agreed-upon conditions.

The main characteristics of bonds include:

1. Principal: Bonds have a fixed face value, which represents the amount owed by the issuer to the bondholder.

2. Interest: Bondholders are entitled to receive fixed or variable interest payments within a specified period, usually calculated on an annual basis.

3. Maturity Date: Bonds have a maturity date, upon which the issuer pays the bondholder the principal amount.

4. Issue Price: Bonds can be issued at face value (par value) or at a market price (determined by market conditions).

There are various types of bonds, including government bonds, corporate bonds, convertible bonds, and more. Different types of bonds come with different yields, risks, and redemption conditions. Investors often use bonds to achieve stable fixed income, capital preservation, and risk diversification.

It is important to note that although bonds offer relatively stable returns and lower risks compared to other investment instruments, bond investments also come with corresponding risks such as interest rate risk, credit risk, and inflation risk. Therefore, before investing in bonds, investors should assess their investment objectives, risk tolerance, specific risk factors of the bonds, and consider seeking advice from a professional investment advisor for comprehensive financial guidance.

Here are some common types of bonds:

1. Government bonds: Bonds issued by government entities, which can be classified as international, domestic, or local government bonds. Government bonds are generally considered the safest type of bonds because they are issued by sovereign nations.

2. Corporate bonds: Bonds issued by corporations to raise funds. The risk of corporate bonds depends on the credit rating and financial condition of the issuing company.

3. Mortgage-backed bonds: Bonds secured by assets such as real estate or automobiles. The return on mortgage-backed bonds is closely tied to the value of the underlying assets.

4. High-yield bonds (commonly referred to as "junk bonds" in the bond market): Bonds issued by lower-rated companies or developing countries. These bonds typically offer higher interest rates but come with higher risks.

5. Investment-grade corporate bonds: Bonds issued by companies with higher credit ratings. These bonds have relatively lower risks due to their higher credit ratings.

6. Municipal bonds: Bonds issued by local or regional governments to fund public projects.

7. Convertible bonds: Bonds that can be converted into company stock under certain conditions. These bonds provide bondholders with the option to convert into shares when the company performs well.

These are just some common types of bonds, and there are other types as well, each with its unique risk and return structure. Before investing in bonds, it is recommended to thoroughly research and understand the corresponding risks and return characteristics in order to make informed investment decisions.

Here are several risks associated with bonds:

1. Credit risk: Also known as default risk or debt risk, this refers to the issuer's inability to pay principal and interest in a timely or full manner. If the issuer defaults on its debt obligations, investors may suffer losses.

2. Interest rate risk: This risk arises from fluctuations in interest rates. When market rates rise, the value of existing bonds may decline as investors can purchase newly issued bonds with higher yields. Therefore, bondholders may be stuck with lower fixed interest rates, resulting in an opportunity cost.

3. Market risk: This refers to the impact of overall market conditions on bond values. Factors such as economic recessions, political events, or financial crises can cause market volatility, which in turn affects bond prices. Investors may face the risk of declining bond prices.

4. Inflation risk: Rising inflation can have a negative impact on bonds. As inflation erodes the purchasing power of money, fixed-rate bonds may fail to keep up with inflation growth in terms of future interest and principal payments, leading to a decrease in real returns.

5. Market liquidity risk: This refers to the ease with which bonds can be bought or sold in the market. If a particular bond market lacks liquidity, investors may find it difficult to sell or acquire the bonds they hold, which can affect their trading ability and price discovery.

For the basic knowledge and trading mechanism of Bonds, please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at "www.ifec.org.hk" when referring to information using this link.

Futures

Futures are a type of financial derivative that allows investors to buy or sell specific assets at an agreed price on a future date. Here is some basic knowledge about futures:

1. Definition: Futures are standardized contracts traded on exchanges, specifying the delivery of a particular underlying asset (such as commodities, financial instruments, etc.) on a specific future date.

2. Underlying Assets: The underlying assets of futures contracts can be commodities (such as gold, crude oil, etc.), financial instruments (such as stock indices, bonds, etc.), or other assets.

3. Exchanges: Futures contracts are traded on specific exchanges, and investors can engage in trading through brokers or online platforms.

4. Contract Specifications: Each futures contract has specific contract specifications, including contract size, delivery month, delivery location, etc. Investors need to understand these specifications in order to participate in trading.

5. Trading Mechanism: Futures trading generally involves margin trading, where investors only need to pay a small portion of the contract value as margin. This allows for leverage, which amplifies potential investment returns. However, it should be noted that leverage also magnifies risks.

6. Risk Management: Futures trading involves price fluctuations and potential risks. To manage risks, investors can employ various strategies like stop-loss orders, futures arbitrage, etc.

7. Delivery: If an investor holds a futures contract until the delivery date, the delivery will take place according to the contract terms. It can be physical delivery (for commodities) or cash settlement (for financial indices), depending on the specifics of the contract.

8. Price Influencing Factors: Futures prices are influenced by multiple factors, including supply and demand dynamics, market expectations, political and economic events, etc. Investors need to pay attention to these factors when making trading decisions.

It is important to note that futures trading involves high risks. Novice investors should thoroughly understand the market, risks, trading strategies, and seek professional advice to reduce risks and enhance the chances of investment success.

While futures trading can provide investment opportunities and hedging tools, it also carries certain risks, including the following:

1. Price Risk: The price of a futures contract is influenced by market supply and demand dynamics and expectations. If the market price experiences unfavorable changes, investors may incur losses. For example, if the futures price declines, the buyer may need to purchase the asset at a higher price than the market price.

2. Leverage Risk: Futures trading often involves leverage, meaning investors only need to pay a small portion of the contract value as margin to control a larger amount of assets. However, this also means that if the market moves unfavorably, investors may lose more than the initial margin paid. Therefore, futures trading carries a high leverage risk.

3. Liquidity Risk: The liquidity of the futures market can be affected by a decrease in market participants or drastic price fluctuations. When market liquidity is low, investors may have difficulty selling or buying futures contracts in a timely manner or may have to transact at unfavorable prices.

4. Policy Risk: Changes in government policies and regulatory measures can significantly affect the futures market. For example, altering interest rate policies, introducing new regulatory rules, or imposing restrictions on certain trading activities can have adverse effects on the futures market.

5. Unforeseen Risk: There are always unforeseen risks in the market, such as natural disasters, conflicts, or global events. These events can impact market supply and demand dynamics, and have adverse effects on futures trading.

Investors should assess their own risk tolerance and approach futures trading cautiously. It is advisable to establish sound risk management strategies, such as setting stop-loss and take-profit levels, diversifying investment portfolios, maintaining sufficient margin levels, and regularly reviewing and adjusting trading strategies. Additionally, it is recommended that investors fully understand the relevant rules, risks, and regulatory mechanisms of the futures market before engaging in futures trading.

For the basic knowledge and trading mechanism of futures, please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at "www.ifec.org.hk" when referring to information using this link.

Options

Options are financial derivatives that give the buyer (holder) the right, but not the obligation, to buy or sell an asset at a predetermined price within a specific period of time or before a specific date, as agreed upon in advance.

Options can be divided into two main categories: call options and put options. A call option grants the buyer the right to purchase an asset, while a put option grants the buyer the right to sell an asset to the buyer within a specific period of time.

Option trading typically involves three main participants: the buyer, the seller, and the underlying asset. The buyer pays a fee known as the option premium to purchase the option and acquire the right to buy or sell the asset. The seller, on the other hand, collects this option premium and fulfills the corresponding transaction when the buyer exercises the option. The underlying asset can be stocks, commodities, currencies, indices, etc.

One important characteristic of options is that they allow the buyer to control a large amount of capital with a smaller cost to buy assets or participate in the market. This leverage makes options trading highly attractive for investment and risk hedging purposes.

The profitability of option trading depends on the price movement of the underlying asset at the time of option expiration. If the price is favorable to the buyer, they can exercise the option and buy or sell the asset at the agreed-upon price. Otherwise, the buyer can choose not to exercise the option and only lose the option premium paid.

It is important to note that options trading involves high risks and can result in financial losses. It is recommended to seek professional financial advice and have a comprehensive understanding of options trading knowledge and risks before engaging in option trading.

The risks associated with options trading mainly involve the following aspects:

1. Directional risk: Option holders face profit or loss risks due to changes in asset prices. If the asset price moves in the direction anticipated by the option holder upon expiration, they can profit by exercising the option. Otherwise, they may incur losses. However, compared to holding the actual asset, options have limited risks as the holder only loses the option premium paid.

2. Time decay: Options have a portion of their price attributed to time value, which represents the cost of holding the option. As time passes, the time value of an option gradually diminishes, resulting in time decay risk. If the option holder fails to realize the expected price movement before the option expires, the time value may rapidly decrease, leading to losses.

3. Volatility risk: Option pricing is closely related to the volatility of the underlying asset. If the volatility of the underlying asset is lower than expected, the option holder may not achieve the desired return due to limited price movements. Conversely, if the volatility is higher than expected, option prices may experience significant fluctuations, leading to losses for the investor.

4. Liquidity risk: Certain options markets may lack sufficient liquidity. In such cases, it may be challenging for option holders to buy or sell options, making it difficult to execute strategies and potentially impacting option prices. Lack of liquidity can increase the risk of being unable to close or adjust positions promptly.

To manage option risks, investors can consider the following:

1. Gain a comprehensive understanding of the options market: It is crucial to have knowledge about the characteristics of options contracts, pricing models, trading rules, and strategies. Having a deep understanding of the market helps investors evaluate risks and returns better and develop appropriate trading strategies.

2. Establish risk management strategies: Investors can employ various risk management tools and strategies, such as purchasing protective options, implementing arbitrage strategies, and limiting positions, to reduce overall risks in options trading.

3. Diversify the investment portfolio: Avoid concentrating all funds into a single options contract. Instead, diversify investments across different options contracts, underlying assets, or expiration dates to lower overall portfolio risk.

4. Determine stop-loss strategies: Set stop-loss levels to exit positions promptly and prevent further losses. Stop-loss strategies can help investors limit potential losses in options trading.

In conclusion, options trading carries certain risks. However, through proper risk management and strategies, investors can lower risks and increase the probability of investment success. When engaging in options trading, investors should carefully assess their risk tolerance and seek professional financial advice.

For the basic knowledge and trading mechanism of options, please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at "www.ifec.org.hk" when referring to information using this link.

Equity Linked Notes (ELNs)

Equity-linked notes (ELNs) are a type of financial instrument that are correlated with the performance of specific stocks or stock indices. They are structured notes that combine characteristics of both stocks and bonds. In an equity-linked note, investors purchase the note, and its returns are linked to the performance of the underlying stocks or stock index. If the linked stocks or index perform well, investors can earn higher returns. However, if the stocks or index perform poorly, investors may face the risk of reduced returns. One distinguishing feature of these notes is that they specify the underlying stock or index on the face of the note. For example, an equity-linked note may be linked to the stock of a particular company or to a stock index such as the S&P 500 or Dow Jones Industrial Average. The returns on the note are typically calculated based on the performance of the linked stocks or index, often in a predetermined ratio, and settled at maturity. Equity-linked notes are commonly used in investment portfolios to diversify holdings and provide exposure to the stock market. Investors can gain returns from specific stocks or stock indices in the market without directly purchasing and holding those stocks.

Equity-Linked Notes (ELNs) are financial instruments that combine elements of both stocks and bonds. When investors purchase ELNs, their returns are linked to the performance of specific stocks or indices. However, like any financial instrument, ELNs also carry risks.

Here are some potential risks associated with Equity-Linked Notes:

1. Market Risk: The returns of ELNs are influenced by fluctuations in stock prices or indices. If the performance of the related stocks or indices is poor, investors may face losses in their invested capital and returns.

2. Credit Risk: The issuing institution of ELNs may face credit risk. If the issuing institution encounters financial difficulties or defaults, investors may not receive the promised returns on time.

3. Legal Risk: Some ELNs may be subject to legal risk, meaning investors may not be able to achieve the expected returns from the equity-linked notes due to legal or other factors.

4. Liquidity Risk: ELNs may lack liquidity, making it difficult for investors to trade or transfer them to other investors when needed.

5. Call Risk: Some ELNs may require investors to purchase related stocks under certain conditions. If investors are unable or unwilling to fulfill these requirements, they may need to bear additional risks or costs.

Investors should assess these risks and understand the specific terms and conditions of ELNs based on their investment objectives, risk preferences, and financial situation. It is recommended to consult with professional financial advisors or wealth management experts before considering ELN investments to ensure a good understanding of the risks involved and to choose suitable investment options.

For the basic knowledge and trading mechanism of Equity Linked Notes (ELNs), please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at "www.ifec.org.hk" when referring to information using this link.

Fixed Coupon Note (FCN)

Fixed Coupon Notes are a type of structured product that pays a fixed coupon to investors under a pre-defined schedule until an early redemption event occurs or upon maturity. Fixed Coupon Notes are usually linked to the performance of a single stock, a basket of stocks or stock indices, etc.

Key Features

A fixed coupon amount is made on the coupon payment date.
The minimum tenor period is normally at least 2 months or above and at most 12 months (negotiable with issuer).
A Knock-out (“KO”) barrier level is set as a percentage of the initial fixing level of the underlying asset(s). The KO event is deemed to occur when the closing price of its underlying asset(s) is at or above the KO barrier on the relevant KO observation date. FCN will be terminated early upon the KO event with 100% notional amount being returned to the investor. If the KO event does not occur, FCN will still be valid until its early redemption or maturity.
If the closing price of the underlying asset(s) is below the strike price on the final observation date, the investor will receive physical delivery of the underlying asset(s) at the strike price where physical settlement is applicable to that/those underlying asset(s).

FCN may involve some or all of the following risks:

Issuer’s credit risk
Market risk
Interest rate risk
Foreign exchange risk
Reinvestment risk
Liquidity risk
Limited secondary market

Accumulator

Over-the-counter (OTC) accumulators, which are not traded on exchange, do not have standardised terms. Both the buy side and sell side negotiate the contract terms, such as contract tenor, daily number of shares to be bought (accumulated), and the strike and knock-out prices, etc. Some accumulator contracts may even come with special terms such as a “multiplier” condition.

Sample Terms of Accumulator:

Issuer / Counterparty
Underlying asset (eg. Stock)
Reference underlying asset price (eg. Share price)
Strike price
Contract tenor
Knock-out clause
Guaranteed period which means the number of shares that the investor must receive even knock out event happened during the guaranteed period
Daily underlying amount to be bought (eg. Number of shares)
Multiplier condition (Gearing ratio)

Apart from accumulators, there is another instrument called “decumulator”, which is the reverse of an accumulator. Simply put, a decumulator contract requires an investor to sell a fixed number of underlying shares at a pre-determined price (i.e. the strike price which is usually higher than the market price on the contract date) every day. The risks and returns of decumulators are also different from those of accumulators. As decumulators are structured to capture the downside of the underlying share price, investors will have to bear the upside risk of the price, which could be theoretically unlimited.

Example of an accumulator transaction

Underlying asset: Stock Z
Tenor: 6 months
Shares accumulated per day: 3,000 shares
Accumulation days: 20 trading days per month x 6 months = 120 days
Strike price: $20
Knock-out price: $26
Initial price of Stock Z: $24
Multiplier/ Gearing ratio: 2
Number of shares accumulated::

If strike price =< market price of Stock Z：3,000 shares per day

If strike price > market price of Stock Z: 6,000 shares per day (=3,000 shares x gearing ratio of 2)

If market price of Stock Z >= knock-out price: The accumulator contract would be terminated

Maximum total number of shares accumulated: 720,000 shares (= 3,000 shares per day x gearing ratio of 2 x 20 trading days per month x 6 months)
Maximum notional amount: $14,400,000 (= 720,000 shares x $20)

Risk Disclosure Statement on Term Sheet

1. General Risk of Derivatives:

Equity Accumulator / Decumulator is a derivative product, which is complex and may involve substantial risks. It is not possible to accurately predict what Investor’s return on this product will be because such return depends on a number of factors. This product is only suitable for sophisticated investors who have sufficient knowledge and experience in financial and business matters to evaluate the relevant risks.

2. Principal Protection:

Equity Accumulator / Decumulator is not principal protected. Investors are exposed to the unlimited risk of the underlying stock trading unfavourably.

3. Market Risk:

Investing in Equity Accumulator / Decumulator involves market risk. There are many factors that affect the market value of this product. Changes in the price or value of the underlying stock can be unpredictable, sudden and large. Such changes may result in the price of the underlying moving adversely to Investor’s interests and negatively impacting on the return on this product. For equity accumulator, Investor may suffer substantial loss as he is bound by this product to buy periodically the agreed amount of the underlying asset when the market price falls below the Strike Price. For equity decumulator, Investor may suffer substantial loss as he is bound by this product to sell periodically the agreed amount of the underlying asset when the market price rises above the Strike Price.

4. Credit Risk:

Investor is relying upon the creditworthiness of Issuer and will be exposed to the credit risk of it.

5. Secondary Market and Liquidity Risk:

There might not be a liquid secondary market in the accumulator / decumulator contracts. This product does not trade on any exchange, and may be illiquid. As a result, it may be impossible for Investor to sell it to Issuer / Counterparty, any of its affiliates, another purchaser or dealer and there is no central source to obtain current prices from other dealers. Investor should aware of the tenor of this product, the longer the tenor, the higher the exit costs for the early termination of contract.

6. Corporate Actions/Extraordinary Events:

Other risks may impact on the value of this product, for example corporate actions or extraordinary events in relation to the underlying stock may occur which have a dilutive effect on the value of the underlying. In certain circumstances Issuer / Counterparty has discretion as to the adjustments that it makes, if any, following corporate events.

Disclaimer

This presentation material and the products or services referred herein (collectively, the “Products”), are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to any law or regulations or would subject any member of Linkways Investment Management Limited or Linkways Asset Management Limited (“Linkways”) to any registration or licensing requirement. Recipients and addressees of this presentation material possess or accept or use this presentation material and the Products only to the extent permitted by the applicable law and regulations, and should be aware of and observe all such applicable law and regulations.

This presentation material is intended for general reference only and should not constitute or be regarded as an offer or solicitation of an offer or a recommendation or the basis for any contract, to sell or to purchase or to subscribe for or to invest in or to enter into the Products. The services mentioned in this presentation material may be subject to legal restrictions in certain countries and may therefore not be on offer in their entirety everywhere. Contents of this presentation material may be amended from time to time without prior notice. Nothing in this presentation material constitutes investment, legal, accounting, tax or other advice nor a representation that any product, service, investment or investment strategy is suitable for any person. The price of financial products may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling financial products. It is not possible for this presentation material to disclose all the risks and other significant aspects associated with the Products. Each prospective investor should consult independent professional advisers before making investment decision, in particular, in determining the suitability and assessing the investment risks of any product or service.

To the extent permitted by applicable law and regulations, Linkways disclaims liability for any error, omission or inaccuracy of the contents of this presentation material and any loss arising from the use of or reliance on this presentation material.

Investment involves risks. Investors should note that value of investments can go down as well as up and past performance is not necessarily indicative of future performance. This document does not and is not intended to identify all of the risks that may be involved in the products or investments referred to in this document. Investors must make investment decisions in light of their own investment objectives, financial position and particular needs and where necessary consult their own professional advisers before making any investment. Investors should read and fully understand all the offering documents relating to such products or investments and all the risk disclosure statements and risk warnings therein before making any investment decisions.