The Southern 2x Long SK Hynix ETF has rapidly grown to become the largest Exchange-Traded Product (ETP) listed in Hong Kong, with assets under management (AUM) exceeding HK$130 billion (approximately $16.6 billion USD). This achievement ends the long-standing 27-year dominance of the Tracker Fund of Hong Kong, which had been the leading ETP since its inception in 1999. The SK Hynix ETF accomplished this milestone in just over eight months since its launch in October of last year, having already surpassed the HK$100 billion mark on June 17.
CSOP Asset Management, the manager of the 2x Long SK Hynix ETF, which is Hong Kong's largest single-stock leveraged ETF, recently increased the options allocation limit for the fund to 49% from 40% of net assets. This move, while not directly increasing holdings of SK Hynix shares, significantly expands the potential for options exposure. The firm has warned that this increased reliance on options could lead to higher investment costs, potentially reaching as much as 40% of the fund's net asset value, which would be eroded by options costs alone. This could also worsen tracking error and amplify downside risk for investors.
The fund does not primarily hold SK Hynix stock directly; instead, it aims to achieve twice the daily return of SK Hynix shares through swap agreements with global investment banks and by purchasing options. Up to 80% of the fund's assets can be invested in customized swap contracts. Analysts, such as Sandeep Rao of Leverage Shares, estimate that the derivatives activity and associated hedging flows from leveraged ETFs tied to SK Hynix now account for an estimated 60% to 70% of the trading in the South Korean chipmaker's shares. Despite concerns about volatility, Wang Yi, chief investment officer of CSOP Asset Management, has stated that the ETF's trading shows little correlation with swings in SK Hynix's stock and that the fund's daily rebalancing has a limited impact on the stock's volatility.
The rapid growth of the SK Hynix 2x Leveraged Long ETF underscores the significant impact of the AI industry on memory chip demand and the high levels of leverage across Asia. As of June 21, the fund's AUM reached a record $13 billion, tripling in just two months and accounting for 13% of Hong Kong's total ETF assets. The firm also cautioned investors that a halt in new unit creation, due to counterparties reaching contractual limits, could lead to the ETF trading at a significant premium or discount to its net asset value, widening the gap from its targeted leveraged return.
