Leveraged and inverse products (L&I Products) are designed to deliver a daily return equivalent to a multiple of their underlying assets’ performance, e.g. 2x or -2x. However, some L&I Products may adopt a flexible leverage structure which gives product providers greater flexibility to manage product capacity during periods of high-volume trading. L&I Products are daily products and are not intended to be held for more than one day.

L&I Products’ capacities refer to the size of the underlying leveraged or inverse exposure that a product can support through the use of derivatives (e.g. swaps, futures and options). L&I Products with highly dynamic capacity dependent on evolving market conditions are required to adopt a flexible leverage structure. These may include Single Stock L&I Products in general, and certain index-based L&I Products.

Under this structure, the leverage factor may vary on a daily basis depending on market circumstances, subject to a maximum leverage level of 2x for leveraged products and -2x for inverse products.

Under normal market conditions, L&I Products adopting this structure will generally seek to provide the stated maximum leveraged or inverse daily performance of their respective underlying assets. However, when necessary, the product provider may reduce the targeted leverage factor to a level that is lower, or substantially lower, than the maximum leverage factor.

Adjustments to the leverage factors are not made primarily based on whether the underlying asset is rising or falling. Key considerations include:

• Capacity constraints, such as limited availability of swaps, options, futures or other derivatives needed to obtain exposure to the underlying asset;
• Significantly higher costs of obtaining leverage exposure; or
• Liquidity constraints, where reduced liquidity of the underlying asset materially affects the product’s ability to rebalance its portfolio.

• Product name
  L&I Products with a flexible leverage structure will reflect the flexible leverage feature and indicate the maximum leverage level in their product names, such as “Max 2x” (for a leveraged product) or “Max -2x” (for an inverse product).

• Daily targeted leverage factor
  For L&I Products with a flexible leverage structure, the targeted leverage factor for the next trading day will be published on the products’ websites and the HKEXnews website after market close each trading day and, in any event, before the Hong Kong market opens on the next trading day.

• Associated risks
  Under a flexible leverage structure, an L&I Product may operate at a leverage factor that is lower than its stated maximum leverage level. As a result, the product's return may not reflect the maximum leverage level shown in its name.
  
  If the leverage factor is reduced before a significant movement in the underlying asset, the product's gains may be lower than they would have been under a higher leverage factor. For example, a leveraged product may generate smaller gains if the leverage factor is reduced before a sharp rise in the underlying asset. Similarly, an inverse product may generate smaller gains if the leverage factor is reduced before a sharp fall in the underlying asset.

For L&I Products, daily performance refers to its daily NAV return, and daily generally refers to the period from the close of the underlying market on one business day to the close of the underlying market on the next business day, when both Hong Kong market and the underlying market are open for normal trading.

As illustrated in Know more about daily rebalancing, L&I Products are normally rebalanced at the end of trading of the underlying market on each business day in order to achieve their investment objective on a daily basis. For other points of time between two business days, price movements of the underlying asset may change the product’s exposure to the underlying asset and its intraday indicative NAV (iNAV), resulting in a deviation from the latest daily targeted leverage factor. As a result, investors who buy an L&I Product in the middle of the trading session may experience returns that differ from the product's targeted leveraged or inverse exposure.

In addition, investors should note that a daily rebalancing cycle may sometimes cover more than one day, for example when the Hong Kong market or the underlying market is closed due to a holiday or other market disruption.

1. Both HK and underlying markets open

2. HK market opens but underlying market closes

3. Underlying market opens but HK market closes

Investors should read the offering documents carefully and fully understand the product’s features, underlying asset, operation and risks. In particular, it is important to understand both the general risks of L&I products and the specific risks of Single Stock L&I Products.

Investors should also pay attention to the bid-ask spread and refer to the iNAV published on the product’s website to assess whether the trading price is reasonable. If investors buy the product at a premium to its iNAV, its subsequent price performance may significantly deviate from the daily targeted leveraged or inverse performance of the underlying asset when the premium subsequently narrows.

Investors are encouraged to conduct the D-A-I-L-Y assessment, an infographic prepared by the SFC to facilitate investors understanding of L&I Products.