Notice on HSI and HSCEI Leveraged and Inverse Products 1-for-2 unit subdivision (effective date: 9 am on 13rd Nov 2017)

Why invest in Leveraged and Inverse Products (the Products)

i) Lower volatility in the Hong Kong stock market+

Investors may have found it increasingly difficult to capture short term opportunities in the Hong Kong Stock Market. The graphs below illustrate the intraday and day-to-day movement for Hang Seng Index (HSI) and Hang Seng China Enterprises Index (HSCEI) for the past 5 years. Data shows intraday movement for both HSI and HSCEI had dropped to the lowest level since 2012, with intraday movement amounting to only 0.8% and 1.1% of the index level in 2017 Q1. Due to lower volatility, investors may consider the use of leveraged tools to capture any short to mid-term market view.

Data Source: Bloomberg, as at 31st Mar 17.

ii) Leveraged and Inverse Product: Fill up the missing gap in Hong Kong leveraged market+

Warrants, CBBCs (Callable Bull Bear Contracts) and futures are widely-used leveraged tools in the Hong Kong stock market. In general, financial products exhibit risk-return trade off, thus products which offer higher gearing may involve more technical aspects.
The challenge for investing in warrants is that besides the underlying price movement, other technical issues such as changes in implied volatility and time decay could also affect warrant prices. While gearing for actively traded CBBC could be 40 times or above, high gearing also means higher knock-out chances. CBBC investors may have experience on the underlying spot shooting beyond the CBBC knock-out level before moving into the expected direction thus encountering losses. Futures contract provides unlimited upside and downside with margin call risk, posing difficulties in estimating the realized gain and losses when opening positions. On the whole, leveraged tools in the Hong Kong stock market has always been perceived as high risk products.

HSI and HSCEI Leveraged and Inverse Products aim to provide a daily return of 2 times and -1 times respectively, and are not affected by technical factors such as implied volatility and time decay. The relatively moderate gearing compare to the abovementioned products allows investors to remain focused on market technical and fundamentals. The launch of local index Leveraged and Inverse Products is a breakthrough to the Hong Kong stock market as leveraged tools could be sub-divided to moderate and high risk profile to cater various investors’ risk appetite.

^ Data as at 1st March 2017. Future Contracts initial margin being HKD 74,750. Data source: HKEX

iii) Identification of Leveraged and Inverse Products+

The English stock short names of Leveraged and Inverse Products appear as follows in the Hong Kong Stock Exchange’s securities trading system.。

iv) Usage of Leveraged and Inverse Products+

Short to mid-term directional trading

Hedging tool for heavy weighted index constituents

An investor may view their heavy weighted index constituents overbought in the short run, but are worth holding onto in the long run. Thus he may consider using Inverse Product to hedge the potential downside risk of the stock. Using Tencent, one of the heavy weighted constituents of Hang Seng Index as example, the stock closed at HKD 222.8 on the 31st March 2017. According to Bloomberg, the beta of Tencent was 1.01 to the index.

Since the board lot for 7336 is 100 units, the investor may consider investing 7,600 units of 7336 as initial hedging. Investor should be aware that short term correlation between the index and heavy weighted stock may deviate from beta. Moreover, for long term hedging purposes, investor may need to conduct dynamic hedging by increasing or reducing holdings of inverse products according to stock price movements.

Points for intraday trading for Leverage and Inverse Products

1) All Leveraged and Inverse Products traded in the Hong Kong Stock Exchange are exempted from stamp duty, bringing lower transaction costs compared to stock trading.

2) Mirae Asset Horizons Leveraged and Inverse Series had appointed several market makers to provide intraday liquidity, encouraging products to have tight bid-ask spread and sufficient market depth, allowing investors to buy or sell easily. According to Bloomberg, for the first month since listing, the aggregate turnover for HSI and HSCEI Leverage and Inverse Products amounts to a daily average turnover close to HKD 600 million.

3) ETF may trade at premium/ discount, would HSI and HSCEI Leveraged and Inverse Products encounter the similar issue?

Should there be any significant premium/discount level for HSI and HSCEI Leveraged and Inverse Products, in theory, the extent should be greatly reduced. The reason behind is because the trading hours for HSI and HSCEI Leveraged and Inverse Products overlaps with the futures market, hence should the Product experience discount level, index arbitrageurs could buy the Product and sell futures simultaneously. On the other hand, should the Product experience premium level, index arbitrageurs could sell the Product and buy futures simultaneously, causing the chances and extent for any premium/ discount to remain low for HSI and HSCEI Leveraged and Inverse Products.

HSI and HSCEI Leveraged and Inverse Products tend to follow the performances of futures market closely. Investors can find our latest Product premium/discount level by entering our website: www.miraeasset.com.hk/li . Investors could look into the “Estimated NAV per Unit” section, where the data automatically refreshes every 15 seconds during trading hours for reference purposes.

Points for holding Leverage and Inverse Products overnight

1) Low and transparent expense ratio is one of the advantages for investing in Leveraged and Inverse Products. The ongoing charges for Mirae Asset Horizons HSI and HSCEI Leveraged and Inverse Products are estimated to be 1.28% per year# (inclusive of management fee 0.65%), indicating the annual average daily ongoing charges## to be 0.0051% per trading day. Using the IPO price of HKD 15 for Mirae Asset Horizons HSI and HSCEI Leveraged and Inverse Products, theoretically it would take around 26 trading days to deduct 1 tick or HKD 0.02 from the Product price to cover ongoing charges.

2) Compounding effect
An investor holding Leveraged and Inverse Products for more than 1 day may find realized performance to deviate from theoretical movement. Overall the best scenario for holding Leveraged and Inverse Product is when market is stable with short to mid-term upward/downward trend. The least favourable scenario is when market is volatile but directionless. Below are some examples:

* Assuming Management fee and tracking error as zero

# This is indicative only because the Product is newly established. It represents estimated ongoing expenses chargeable to the Product as a percentage of the estimated average net asset value of the Product (the “Net Asset Value”). This figure may vary from year to year. The actual figure may be different from the estimated figure.

## This is indicative only because the Product is newly established. It is equal to the estimated ongoing charges figure divided by the anticipated number of dealing days during the first year of listing. The actual figure may be different from the estimated figure and may vary from year to year.

The Role of Product Manager

When an investor invest HKD 1000 into Daily (2x) Leveraged Product, the product manager would purchase HKD 2000 worth of futures contracts. The product manager will rebalance futures holdings at or around the close of trading of the underlying markets by increasing exposure in response to a rise in the index level or reducing exposure in response to a fall in the index level. The daily rebalancing activity is to allow the Product be consistent with its daily (2X ) investment objective.

An investor investing HKD 1000 into Daily (-1x) Inverse Product, the product manager would short sell HKD 1000 worth of futures contracts. The product manager will rebalance the futures holdings at or around the close of trading of the underlying markets by decreasing the amount of short selling in response to a rise in the index level or increasing the amount of short selling in response to a fall in the index level. The daily rebalancing activity is to allow the Product be consistent with its daily (-1X ) investment objective.

The product manager shall conduct independent futures contracts activities for each leveraged and inverse products. The product manager shall roll-over futures contracts and handle any potential margin requirements on behalf of leveraged and inverse product investors, thus limiting investors’ loss to their principal investment. Any residual cash after portfolio holdings will either be in cash and kept under trustee account or kept in bank accounts in the form of short term deposits denominated in HKD.

^ Before fees and expenses

# This is indicative only because the Product is newly established. It represents estimated ongoing expenses chargeable to the Product as a percentage of the estimated average net asset value of the Product (the “Net Asset Value”). This figure may vary from year to year. The actual figure may be different from the estimated figure.

## This is indicative only because the Product is newly established. It is equal to the estimated ongoing charges figure divided by the anticipated number of dealing days during the first year of listing. The actual figure may be different from the estimated figure and may vary from year to year.

Disclaimer﹕

Certain information contained in this document is compiled from third party sources. Whilst Mirae Asset Global Investments (Hong Kong) Limited (“Mirae Asset HK”) has, to the best of its endeavor, ensured that such information is accurate, complete and up-to-date, and has taken care in accurately reproducing the information, it shall have no responsibility or liability whatsoever for the accuracy of such information or any use or reliance thereof. Mirae Asset HK accepts no liability for any loss or damage of any kind resulting out of the unauthorised use of this document. The information contained in this document is for information purposes only and does not constitute any recommendation, offer or solicitation to buy, sell or subscribe to any securities or financial instruments in any jurisdiction.

Investment involves risk. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. Past performance is not indicative of future performance. Before making any investment decision to invest in the Fund, investors should read the Offering Documents for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investments. References to particular sectors, securities or companies are for general information and illustrative purposes only and are not recommendations to buy or sell a security, or an indication of Mirae Asset HK’s holdings at any one time.

This document is issued by Mirae Asset HK and has not been reviewed by the Securities and Futures Commission.