The fund is expected to have a relatively high participation rate estimated at between 50% and 70%, while the option has a quarterly lock-in structure, meaning that a proportion of any gains are locked in for the life of the fund. At maturity, an average of the quarterly gains or losses of the portfolio are taken to calculate the return of the fund, and investors receive either any upside achieved by the stock portfolio, or the 110% guaranteed return, whichever is greatest.
Meanwhile, US investment bank Merrill Lynch has offered a return-protected reverse-floor note. The structure uses a reverse cliquet option – where the fund starts with a maximum return of, say, 110%, and any negative performance over the life of the fund is deducted from this return. If the monthly observations add up to a decline in the index of say 70%, the investor receives a return of 40%. A floor of 10.5% has been included, while the fund is 100% principal guaranteed. Investors therefore get the better of 110.5%, or the return through the reverse cliquet option plus the 100% capital guarantee.
The fund is referenced to Merrill Lynch’s proprietary China Dragon Index, which consists of 30 Hong Kong, Singapore and Taiwan companies with more than 25% of their assets or 25% of total revenue in China. Ken Chang, head of Asian equity derivatives strategy at Merrill Lynch, said the strategy allows investment in China in a risk-controlled fashion. Two European pension funds have just invested $10 million in the fund. New funds are expected in the coming weeks. BNP Paribas Asset Management had planned to launch its first fund yesterday, but has since been delayed, while SG, a division of French bank Société Générale, plans to launch its latest fund, called the Double Chance Guaranteed Fund, next week.
“Currently we believe there is an environment for capital guaranteed products, but that window of opportunity might close once interest rates go up, or once equity markets pick up,” added Bert Van Lier, team leader of structured products at ING Investment Management in Amsterdam.