Summary of Key Points
This incident revolves around a change in the regulations for leveraged ETFs: The "Double Long SK Hynix" ETF (07709.HK) under Southern East Capital was renamed to "Up to Two Times Long" due to new rules from the Hong Kong Securities and Futures Commission. Although the change only added the phrase "up to two times," it has left investors who bought at high prices in despair, as their hopes of recovering their losses through a rebound in the underlying stock could be dashed at any time due to potential reductions in leverage. Behind this issue lies a conflict between the fund company's desire to comply with regulations and protect its own interests and the investors' sense of contractual fairness, as well as the inherent contradictions in the fee structure of leveraged products (where managers profit steadily while investors bear all risks).
The ETF's Wild Ride: From a Billion-Dollar Miracle to a Crushing Disaster
The fate of this ETF has been akin to a rollercoaster:
- Boom Phase: Launched in October 2025, it rode on the wave of AI innovation, with SK Hynix (a key supplier of HBM chips) experiencing a surge in stock prices. As a "double long" product (where the ETF's price would rise by 2% for every 1% increase in the underlying stock), it became highly sought after. Within 163 days of its launch, its assets exceeded one billion Hong Kong dollars, surpassing E Fund to become the largest ETF in Hong Kong. Its price soared from HK$17.5 to HK$193.65 (a tenfold increase), making it a market darling.
- Crash Phase: In late June, SK Hynix' stock prices peaked and then began to fall, and its financial reports fell short of expectations. Due to the two-fold leverage, the ETF's decline was even more severe: its value plummeted from HK$193.65 to HK$25.1 (an 87% drop), and its assets shrank from HK$130 billion to HK$25.6 billion, turning into a nightmare for investors.
The Controversy over the Name Change: Why Did the Phrase "Up to Two Times" Hurt Investors So Much?
The change from "double long" to "up to two times" may seem minor, but it had a significant impact:
- Investors' Expectations: Those who bought at high prices hoped that even a small increase in the underlying stock would allow them to recover their losses due to the leverage (for example, a 100% increase in the stock would result in a 200% increase in the ETF). However, now the leverage can be reduced at any time, meaning that even if the stock price returns to its original level, the ETF's value might not reach its previous peak, making recovery impossible.
- Fund Company's Explanation: The company claimed the change was necessary to address extreme situations (such as when the product's size becomes too large to maintain a two-fold leverage ratio). It also stated that it is still maintaining a two-fold leverage ratio. However, investors are concerned that this does not guarantee that the ratio will not be lowered in the future, suggesting that the new rules leave room for such actions.
The Conflict of Interests: The Secret Profit Mechanism of Management Fees
This incident also exposed a flaw in the fee structure of leveraged products:
- Managers' Profits: Regardless of investors' performance, the fund company charges an annual management fee of 1.6%. Since its launch, this ETF has generated a total of HK$356 million, with daily fees reaching nearly HK$4 million at its peak. The company is incentivized to maintain a high leverage ratio (to attract more funds and earn more fees) during market gains and to reduce it during declines (to preserve its asset size and continue collecting fees), putting the managers' interests in direct conflict with those of the investors.
- Investors' Losses: Investors who bought at high prices lost more than 80% of their investment and still had to pay the management fee, adding further pain to their losses.
Compliance Does Not Equal Fairness: The Challenge to the Concept of Contractual Fairness
The fund company argued that the change was in compliance with new regulations (issued by the Hong Kong Securities and Futures Commission in July, which allow leveraged products to adjust their leverage ratios within a two-fold range). But does compliance necessarily mean fairness?
- Change in Contractual Terms: The original product promised a "double long" ratio, but the new rule effectively changed this commitment. Normally, such changes would require a meeting of the fund's holders and prior notification. However, due to the new regulations, the company made the change unilaterally, without giving investors a say.
- Lack of Investor Protection: If future reductions in leverage prevent investors from recovering their losses, there is no clear legal recourse. This incident highlights a core issue in financial markets: rules should not be changed unilaterally at times when investors are most vulnerable; otherwise, the concept of contractual fairness becomes meaningless.
Questions for the Industry
This incident is not isolated; it exposes three major problems with leveraged products:
1. Unreasonable Fee Structures: The profit model where managers benefit regardless of investors' performance encourages them to prioritize asset size over investor interests.
2. Insufficient Investor Education: Many investors purchase leveraged ETFs without realizing that leverage is a double-edged sword and that rules can change unexpectedly.
3. Need for More Stringent Regulation: While the new regulations allow for adjustments in leverage ratios, how can we balance the risks of fund companies with the rights of investors? For example, should there be requirements for prior notification or restrictions on the frequency of such changes?
For individual investors, this is a stark reminder: Leveraged products carry high risks, and they must not only tolerate fluctuations in the underlying stocks but also be wary of unexpected changes in regulations. For the industry, the question remains: how can we uphold the concept of contractual fairness while ensuring compliance with regulatory requirements?
The outcome of this incident is still uncertain, but it has already become a reflection of the complex interplay of rules, interests, and trust in financial markets. For investors, the most painful aspect is not the loss itself, but the fact that regulations can change silently at times when they are most vulnerable.