At or around the close of trading of the underlying A-Shares market on each Business Day, the Product will seek to rebalance its portfolio, by decreasing inverse exposure in response to the Index’s Daily gains or increasing inverse exposure in response to the Index’s Daily losses, so that its Daily inverse exposure ratio to the Index is consistent with the Product’s investment objective.

The table below illustrates how the Product as an inverse product will rebalance its position following the movement of the Index by the end of the day.* Assuming that the initial Net Asset Value of the Product is 100 on Day 0, the Product will need to have an exposure of -100 to meet the objective of the Product. If the Index decreases by 20% during the day, the Net Asset Value of the Product would have increased to 120, making the exposure of the Product -80. As the Product needs an exposure of -120, which is -1x the Product’s Net Asset Value at closing, the Product will need to rebalance its position by an additional -40.

Day 1 illustrates the rebalancing requirements if the Index increases by 10% on the subsequent day; day 2 illustrates the rebalancing requirements if the Index falls by 10% on the subsequent day.

*The above figures are calculated before fees and expenses.

The objective of the Product is to provide inverse investment results that, before fees and expenses, closely correspond to the inverse performance of the Index on a Daily basis only. Therefore the Product should not be equated with seeking an inverse position for periods longer than a day. Investors in the Product should note that the point-to-point performance of the historical inverse performance of the Product over a certain period may not be “symmetrical” to the point-to-point performance of the Index multiplied by -100% over the same period of time due to the effect of “path dependency” and compounding of the Daily returns of the Product. The performance of the Product before deduction of fees and expenses for periods longer than a single day, especially in periods of market volatility which has a negative impact on the cumulative return of the Product, may be completely uncorrelated to the extent of change of the Index over the same period.

Investors must exercise caution when holding the Product for longer than the rebalancing interval, i.e. one Business Day. The performance of the Product, when held overnight, will likely deviate from the inverse performance of the Index.

The Product’s objective is to provide returns which are of a predetermined inverse factor (-1x) of the Daily performance of the Index. The Product does not attempt to, and should not be expected to, provide returns, before fees and expenses, which are the inverse of the return of the Index for periods other than a single day. The Product rebalances its portfolio on a Daily basis, increasing exposure in response to the Index’s Daily losses and reducing exposure in response to the Index’s Daily gains. This means that for a period longer than one Business Day, the pursuit of a Daily inverse investment objective may result in Daily compounding. As such, the Product’s performance may not track -1x the cumulative Index return over a period greater than 1 Business Day. This means that the return of the Index over a period of time greater than a single day multiplied by -100% generally will not equal the Product’s performance over that same period.  Over time, the cumulative percentage increase or decrease in the value of the Product’s portfolio may diverge significantly from the cumulative percentage increase or decrease in of the return of the Index due to the compounding effect of losses and gains on the returns of the Product.

It is also expected that the Product will underperform the return of -100% of the Index in a trendless or flat market. This is caused by compounding, which is the cumulative effect of previous earnings generating earning or losses in addition to the principal amount, and will be amplified by the volatility of the market and the holding period of the Product. The effect of compounding becomes more pronounced on the Product’s performance as its experiences volatility. The following scenarios illustrate how the Product’s performance may deviate from that of the cumulative Index return (-1x) over a longer period of time in various market conditions. All the scenarios are based on a hypothetical HKD10 investment in the Product.

Scenario I: Continuous Upward Trend

In a continuous upward trend, where the Index rises steadily for more than 1 Business Day, the Product’s accumulated loss will be less than -1x the cumulative Index gain. As illustrated in the scenario below, where an investor has invested in the Product on day 0 and the Index grows by 15% Daily for 4 Business Days, by day 4 the Product would have an accumulated loss of 47.80%, compared with a 74.90% loss which is -1x the cumulative Index return.

The chart below further illustrates the difference between (i) the Product’s performance; (ii) -1x the cumulative Index return; and (iii) cumulative Index return, in a continuous upward market trend over a period greater than 1 Business Day.

The chart below sets out the difference between (a) -1x inverse product cumulative return and (b) -1x of index cumulative return in this scenario.

Scenario II: Continuous Downward Trend

In a continuous downward trend, where the Index falls steadily for more than 1 Business Day, the Product’s accumulated gains will be greater than -1x the cumulative Index return. As illustrated in the scenario below, where an investor has invested in the Product on day 0 and the Index falls by 15% Daily for 4 Business Days, by day 4 the Product would have an accumulated gain of 74.90%, compared with a 47.80% gain which is -1x the cumulative Index return.

The chart below further illustrates the difference between (i) the Product’s performance; (ii) -1x the cumulative Index return; and (iii) cumulative Index return, in a continuous downward market trend over a period greater than 1 Business Day.

The chart below sets out the difference between (a) -1x inverse product cumulative return and (b) -1x of index cumulative return in this scenario.

Scenario III: Volatile Upward Trend

In a volatile upward trend, where the Index generally moves upward over a period longer than 1 Business Day but with Daily volatility, the Product’s performance may be adversely affected in that the Product’s performance may fall short of -1x the cumulative Index return. As illustrated in the scenario below, where the Index grows by 12.86% over 5 Business Days but with Daily volatility, the Product would have an accumulated loss of 16.84%, compared with a 12.86% loss which is -1x the cumulative Index return.

The chart below further illustrates the difference between (i) the Product’s performance; (ii) -1x the cumulative Index return; and (iii) cumulative Index return, in a volatile upward market trend over a period greater than 1 Business Day.

The chart below sets out the difference between (a) -1x inverse product cumulative return and (b) -1x of index cumulative return in this scenario.

Scenario IV: Volatile Downward Trend

In a volatile downward trend, where the Index generally moves downward over a period longer than 1 Business Day but with Daily volatility, the Product’s performance may be adversely affected in that the Product’s performance may fall short of -1x the cumulative Index return. As illustrated in the scenario below, where the Index falls by 16.84% over 5 Business Days but with Daily volatility, the Product would have an accumulated gain of 12.86%, compared with a 16.84% gain which is -1x the cumulative Index return.

The chart below further illustrates the difference between (i) the Product’s performance; (ii) -1x the cumulative Index return; and (iii) cumulative Index return, in a volatile downward market trend over a period greater than 1 Business Day.

The chart below sets out the difference between (a) -1x inverse product cumulative return and (b) -1x of index cumulative return in this scenario.

Scenario V: Volatile Market with Flat Index Performance

In a volatile market with flat index performance, the aforementioned compounding can have an adverse effect on the performance of the Product. As illustrated below, even if the Index has returned to its previous level, the Product may lose value.

The chart below further illustrates the difference between (i) the Product’s performance; (ii) -1x the cumulative Index return; and (iii) cumulative Index return, in a volatile market with flat index performance over a period greater than 1 Business Day.

The chart below sets out the difference between (a) -1x inverse product cumulative return and (b) -1x of index cumulative return in this scenario.

As illustrated in the graphs and the tables, the performance of the Product before deduction of fees and expenses is not “symmetrical” to the cumulative performance of the Index over a period longer than 1 Business Day.

For further illustration of the Product’s performance under different market conditions, investors may access the ‘performance simulator’ on the Product’s website at 7373.chinaamc.com.hk, which will show the Product’s historical performance data during a selected time period since the launch of the Product.

A synthetic product aims to replicate the return of a particular index like traditional/physical exchange traded products. Instead of physically holding the underlying securities or assets, derivatives such as swaps are used to track the underlying index. A synthetic product enters into a transaction with a counterparty and the counterparty promises to pay the return on the benchmark the product tracks.

A synthetic product provides a low-cost method for investors seeking access to certain hard-to-access niche markets, less liquid benchmarks, or other difficult to execute strategies that would be costly for traditional/physical exchange traded products to operate. In this regard, synthetic products carry the potential advantage of reduction in costs and tracking error while obtaining market access.

A swap is an over-the-counter financial derivative contract where one party exchanges the cash flows for another for a set period of time. The cash flows being exchanged are often the return or differentials in rates of return earned or realized on particular reference assets or underlying securities or instruments.

Under a standard unfunded swap, the synthetic passive ETF will receive from the counterparty, through the unfunded swap, an exposure to the economic gain (or loss) in the performance of the underlying index (net of fees, charges and indirect costs, if applicable). In return, the synthetic passive ETF will, under the unfunded swap, provide the counterparty an exposure to the economic gain (or loss) in the performance of a portfolio of assets which the fund will purchase with the net proceeds from issue of its shares. The synthetic passive ETF will own that portfolio of assets. For ChinaAMC CSI 300 Index Daily Leveraged / Inverse Products, as illustrated in the diagram below, the unfunded swap is slightly different than a standard structure , the Products will not provide the counterparty an exposure to the economic gain (or loss) in the performance of a portfolio of assets which the Products will purchase with the net proceeds from issue of its units.

Counterparty risk and default risk: The Product seeks to obtain the required exposure through one or more Swaps with different Swap Counterparties. The Product is therefore exposed to counterparty risk and default risk of the Swap Counterparties and may suffer significant losses if a swap counterparty fails to perform its obligations. Derivative instruments are subject to valuation risk and liquidity risk and are susceptible to price fluctuations and higher volatility, which may result in large bid and offer spreads with no active secondary market. The Product may suffer losses potentially equal to the full value of the derivatives.

Intra-day counterparty risk: The Manager manages the Product with the objective to reduce to nil the Product’s single counterparty net exposure on the basis where the Product’s net exposure to each Swap Counterparty exceed 0% at the end of a trading day T, on trading day T+1, the Manager will require that Swap Counterparty make cash payment to the Product so that the net exposure of the Product to each Swap Counterparty is limited to no more than 0% of its NAV. Despite the counterparty risk management measures in place, the management of the Product’s net exposure to each Swap Counterparty to zero is subject to settlement risks arising from settlement failures and market risks (including price movements prior to the required cash payment by the Swap Counterparty to the Product). Any delay in the cash payment by the Swap Counterparty to the Product prior to the end of the relevant trading day T+1 may cause the Product’s exposure to a Swap Counterparty to be larger than zero from time to time.  This may result in significant losses for the Product in the event of the insolvency or default of that Swap Counterparty.

Daily capacity limits risk: Swap Counterparties may have daily capacity limits, and in the event that the limits are reached, the Product’s ability to adjust the size of the Swaps in order to obtain sufficient exposure to achieve its stated investment objective may be adversely affected which will in turn affect the Product’s performance. If the Product is unable to obtain sufficient exposure to the inverse (-1x) performance of the Index because of the limited availability of Swaps linked to the inverse (-1x) performance of the underlying Securities or Futures Contracts of the Index, or if the Product is unable to adjust the size of the Swaps, the Product could, among other alternatives, as a defensive measure, suspend creations or redemptions until the Manager determines that the requisite Swap exposure is obtainable or until the Manager is able to adjust the size of the Swaps. During the period that creations or redemptions are suspended, the Product could trade at a significant premium or discount to the NAV. To the extent that such events result in a termination event under the Product’s Swaps, the risks related to the limited availability of Swaps would be compounded and the Product may be adversely affected.

Increase in swap fees risk: During extreme market conditions, a Swap Counterparty’s costs of financing the underlying hedge may increase significantly.  A Swap Counterparty may in return increase the swap fees which may adversely impact on the Product’s performance.

Early termination of swaps risk: In some circumstances, a Swap may be terminated early under the terms of the relevant agreement which may result in the payment of unwinding fees by the Product and in turn may adversely impact the Product’s performance. Such early termination can also impair the Product’s ability to achieve its investment objective and may subject the Product to substantial loss. Also, the Product may face an increase in the cost to enter into a similar swap agreement with additional Swap Counterpart(ies).