Products need explanation, says Hong Kong regulator

Hong Kong's retail investors have to deepen their understanding of structured products, according to the findings of a Hong Kong Securities & Futures Commission (SFC) survey. And that message was reinforced by Alexa Lam, executive director of intermediaries and investment products at the SFC, in a speech at the Asia Risk annual conference in Hong Kong at the end of November last year.

Six out of 10 investors surveyed had more than five years' financial investment experience, and more than three-quarters of them had more than one year's experience in investing in structured products. Yet only half of equity-linked product investors surveyed could correctly point out that final redemption at maturity would be in the form of stocks if the price of the underlying stock dropped below the strike price - a common feature of most equity-linked notes.

The weighting of structured products in investors' portfolios was inversely proportional to their experience in financial investments, the survey found.

A total of 178 of the 207 respondents last bought an equity-linked, index-linked or credit-linked product, but only around one in 10 recalled having received, read and fully understood the offering documents. Those who had problems understanding the documents said that they contained too much jargon.

The survey also looked at investment results. Almost three-quarters of investors made a profit or broke even in their investment in structured products during the previous 12 months, when the Hang Seng Index rose by around 15%. Only 14% suffered a net loss, and two-thirds of these said they would continue to invest in structured products.

As for holding periods, most investors held their products to maturity, but a quarter redeemed them early, primarily to take profits or due to changed views on the performance of the underlying asset, the survey found.

With regard to investment objectives, many investors bought structured products for perceived higher returns, either comparing to bank deposits of a similar term (42%), or other investments such as direct investments in the underlying assets when views on the movements of the underlying assets' prices were "neutral" or "stable" (28.5%).

The survey also found that most (84.5%) investors considered structured products as "medium" to "very high risk", but 13.5% viewed structured products as "low" or "very low risk". Equity-linked products were most popular (82.6% invested in them).

For the purpose of the survey, structured products refer to unlisted synthetic products targeting retail investors. Structured product investors were defined as those Hong Kong adults aged 18 or above who invested in one or more structured products in Hong Kong during the last two years. The SFC engaged the Social Sciences Research Centre of the University of Hong Kong to conduct the survey.

One major concern of the survey was that some advisers push only one type of product to clients with any risk profile - usually the product that provides the adviser with the biggest return.

"When investors in Hong Kong buy an electronic gadget, they will do research and price the product before buying it," Lam said. "But when it comes to investment products, they often fall under the spell of the adviser and would feel embarrassed if they did not buy something after a consultation, so they do."