Rich Asian investors are investing a record amount of money into complex stock bets that previously led to significant losses. The issuance of structured products linked to Hong Kong and Singapore equities has increased by 80% this year, reaching over $200 billion, according to estimates from BNP Paribas, one of the top issuers.
Products known as accumulators, which require investors to continuously buy stocks at preset levels, and fixed-coupon notes that offer monthly returns, are particularly popular. These instruments help investors build exposure to stocks in a more controlled way, although their complex structure means losses can worsen under certain conditions.
The revival of these investments coincides with a surge in Asia's equities, driven by the artificial intelligence frenzy. Typically marketed by private banks to wealthy clients, structured-note bets this year have been concentrated in Chinese mega-caps such as Alibaba Group and Tencent Holdings, a shift away from US names like Nvidia Corp.
The instruments generally offer a smaller maximum payout than stocks, but some investors are lured by their regular, fixed payments that are usually higher than bond yields, or by the embedded protection they offer. However, the risks can be overlooked, and investors may face significant losses if the market downturns.
At CA Indosuez Wealth Management, some of the most-traded accumulators require investors to purchase double the initially agreed amount of Alibaba shares if the stock price drops more than a certain amount. For fixed-coupon notes, the return is typically tied to an asset such as an equity gauge, single stock, or group of shares.
Demand is surging as the stocks rally, with Alibaba shares jumping nearly 90% this year in Hong Kong, and the Hang Seng Tech Index rising 26% to end years of underperformance against US peers. Wealthy investors are taking on leverage, allowing them to boost bets and amplify returns, although this also amplifies losses in an adverse scenario.
According to Goldhorse Capital Management, the coupon offered by notes tied to Chinese AI names often ranges between 10% and 20% annualized, higher than the 10% to 12% for those tracking an index. The challenge for BNP Paribas is to manage risk given that the current notes are concentrated on a small number of names.
As the market continues to grow, it's not uncommon for wealthy investors to take on more risk, allowing them to boost bets and amplify returns. However, it's essential to remember that the losses can also be significant if the market downturns.
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