The unpredictable second quarter is coming, and the Hong Kong market has new options, "double leverage, long and short available, and no need to stay up late."

In the first quarter, the global market underwent a complete transformation.

The "American exceptionalism" narrative has receded, the "Trump recession" has arrived, and the U.S. stock market has experienced a rare significant correction. Meanwhile, as Europe re-arms itself "at all costs," European stocks have made a strong comeback, and the rise of China's DeepSeek has sparked a grand narrative of "the East rising and the West falling."

In this major upheaval, Bitcoin, as the "gold of the crypto world," Tesla, representing the "Trump trade," and NVIDIA, the "AI leader," all stand at a crossroads, facing enormous uncertainty and directional choices.

As we approach a second quarter that promises to be even more tumultuous, the first batch of Asian stock leveraged and inverse ETFs has officially landed on the Hong Kong stock market, providing investors with "tools" to cope with market volatility.

With double leverage, the ability to go long or short, and no need to stay up all night watching the market... This batch of ETF products launched by Southern Eastern Asset Management Company includes 9 funds, covering leading tech stocks like NVIDIA and Tesla, as well as popular virtual asset targets like MicroStrategy and Coinbase, and even value investment representative Berkshire Hathaway.

These leveraged and inverse products use a swap-based synthetic simulation strategy to track the daily performance of the target stocks at double the rate and the inverse double rate.

On March 25, Gu Chengqi, president of Wall Street Insights, engaged in an in-depth dialogue with Wang Yi, the investment director of the quantitative investment department at Southern Eastern Asset Management Company, discussing some market focal points and the characteristics and advantages of this batch of leveraged and inverse ETFs.

The dialogue was divided into two parts. The first part focused on market concerns, exploring the performance of the aforementioned popular companies, how to respond to risk events in the second quarter, the pricing power of mainland funds in the Hong Kong market, and whether the U.S. economy can successfully "detox." Wang Yi shared insightful views on the performance of various assets and market trends, summarized as follows:

Virtual asset-related stocks: MicroStrategy and Coinbase are experiencing high-level fluctuations, influenced by the gap between policy expectations and actual implementation, as well as the slow growth of Bitcoin spot ETF scale.

AI computing power stocks: Stocks like NVIDIA are in a period of expected adjustment, as the emergence of DeepSeek has led the market to question the U.S.'s dominant position in the AI field, thereby affecting the performance of tech stocks. At the same time, concerns about the sustainability of chip procurement, related companies' Capex issues, and policy support have prompted large internet companies and tech giants to rethink their investment strategies, further impacting market expectations for NVIDIA and Tesla.

Tesla: As a "celebrity stock," its price fluctuations are significantly influenced by external factors, such as Musk's movements, the U.S. president's attitude, and public reactions. Its trading logic includes both the substantive impact of the electric vehicle business and future expectations related to autonomous driving and robotics, with shifts in expectations having a significant impact on stock prices

Market Risks and Investment Strategies in Q2: The global market experienced significant changes in the first quarter following Trump's rise to power, with the Russia-Ukraine situation becoming a key variable that prompted funds to flow from the U.S. to Europe. The European market has become the focus due to fiscal breakthroughs, relatively low valuations, and the negative impacts of the Russia-Ukraine conflict. Although overseas investors have high expectations for the short-term performance of the European market, the market still believes that the U.S. will outperform Europe in the long run. The Japanese market faces challenges due to a weakening dollar and a strengthening yen, which negatively impacts its stock market; however, fundamental analysis shows that the Japanese economy still has resilience, and foreign capital believes it may provide opportunities for low-entry investments.

Hong Kong Stocks Need New Momentum: After the previous valuation recovery, the Hong Kong stock market needs new driving forces, such as real cash flow and performance reflected in individual stock performance; otherwise, it will be difficult to break through the current valuation level. The A-share market appears more cautious compared to Hong Kong stocks, with only technology stocks in the Shanghai Stock Exchange 50 likely to benefit from the current AI development.

Southbound Funds and Hong Kong Market Pricing Power: The scale of southbound funds is enormous, with funds flowing into Hong Kong in the first quarter of 2025 nearing half of the total for 2024, indicating mainland investors' interest in the Hong Kong market. Nevertheless, Wang Yi believes that it will still take time for southbound funds to seize pricing power in the Hong Kong market, as foreign capital still dominates holdings in the Hong Kong market.

U.S. Economy "Detox": Wang Yi believes that certain policy orientations of Trump may have their rationality in the long term, but the key preconditions for their success may have changed, as the iteration of AI or the next generation of technological revolution may not be concentrated in the U.S. Additionally, there are obvious contradictions in Trump's policies, such as the conflict between his stance on inflation and tariff policies, as well as the contradiction between attracting investment and de-globalization. These policy frameworks significantly differ from the economic operation logic of the U.S. over the past few decades, leading to difficulties in policy implementation and increasing market uncertainty, which suppresses corporate investment willingness.

The second part focuses on products, including the main considerations for selecting these target companies. What are the key advantages of individual stock leveraged ETFs compared to existing derivatives like warrants in Hong Kong? What advantages do they have compared to similar products in the U.S.? The key points are as follows:

Why Choose These Companies: Tesla and NVIDIA are the most popular targets in the U.S. market, making them the first choice for the initial products; MicroStrategy and Coinbase are closely related to virtual assets, aligning with the Hong Kong market's high attention to virtual assets; Berkshire Hathaway is included due to Buffett's high recognition and reputation in Asia.

Relative Advantages of Hong Kong Warrants: The individual stock leveraged ETFs from Southern Eastern are superior to Hong Kong's warrants and options in terms of transparency and liquidity. They have a large number of market makers involved, providing fairer quotes and ensuring that market quotes are closely linked to the underlying value of the products. In contrast, the pricing mechanisms for warrants and options are complex, trading operations are cumbersome, and there are liquidity risks, with investors potentially facing significant slippage or being unable to execute trades at expected prices when closing positions

Relative advantages of US stock similar products: The leveraged inverse ETF of Southern Eastern Capital has a unique time window advantage in trading during the Asian session, allowing it to respond to information earlier. It is more flexible in tax treatment, avoiding the tax burden caused by high dividends in similar US products. In addition, this product is listed on the Hong Kong Stock Exchange, which provides higher trading stability and eliminates the risk of relying on individual broker-dealers for night trading.

Suitable for which investors: The leveraged inverse ETF is mainly targeted at retail investors and institutions with restrictions on investing in derivatives. These products are more trading-oriented rather than long-term holding investment tools, suitable for short-term trading strategies.

When will popular Chinese stock products like Alibaba, Tencent, and Xiaomi be launched: Wang Yi stated that the launch of leveraged inverse products in the Hong Kong market follows a gradually open regulatory path, first allowing the issuance of offshore underlying assets, and then introducing new policies based on operational conditions or investor responses after a period of time. A specific timetable cannot be provided at the moment, but the industry holds a positive attitude towards the launch of local stock leveraged inverse products.

The following is the detailed content of the discussion:

Part 1

The underlying companies of Southern Eastern Capital's leveraged and inverse ETFs include AI computing stocks from Berkshire to NVIDIA, as well as digital assets like MicroStrategy. How do you view the recent trends of these asset classes?

Regarding stocks related to virtual assets like MicroStrategy and Coinbase, Wang Yi pointed out that the current market is in a high-level oscillation phase after a surge. This state is mainly influenced by two factors:

First, the gap between policy expectations and actual implementation. Trump had mentioned the possibility of using cryptocurrency as a reserve currency, which raised high expectations in the market. However, the actual policy implementation deviated from expectations, leading to fluctuations in market sentiment.

Second, the scale growth of Bitcoin spot ETFs has stabilized. "Unlike the initial days of significant daily net inflows, which had a large impact on driving up cryptocurrency prices because it was real money inflow," Wang Yi explained.

Currently, the direction of the virtual asset market is unclear, but "investors who have faith in cryptocurrencies will feel that there is still a lot of room for growth in the future, and there will be more policy support, especially with Trump's frequent comments on cryptocurrency."

Regarding stocks related to AI and computing like NVIDIA, Wang Yi believes the market is undergoing an expectation adjustment period. The catalyst for this adjustment comes from multiple aspects:

The emergence of DeepSeek has led the market to question the narrative that "AI only exists in the US," which to some extent explains the phenomenon of "US stocks lagging behind other global markets since the beginning of the year, especially the pullback in tech stocks." At the same time, "the Hang Seng Technology Index has performed strongly this year, reflecting the impact of DeepSeek on the entire AI investment logic."

Although NVIDIA's performance has been good, the market's future expectations for it have begun to waver. Wang Yi mentioned: "Whether chip procurement is still as strong as before involves not only the Capex issues of application companies like Mag7 but also the US Chip Act's tax financial support, as well as Microsoft's previous withdrawal of investment or adjustments to investment plans.""AI investment logic is undergoing a transformation." Previously, everyone believed that more money should be invested, but now many large internet companies or tech giants are reflecting on whether to invest so much money, whether there are cheaper ways, and whether investments can be reduced, etc. "This shift in thinking will inevitably affect market expectations for NVIDIA and Tesla.

It is particularly noteworthy that Tesla's stock price fluctuations are also influenced by additional factors. Wang Yi described it as a "celebrity stock," facing "many external factors, such as Musk's movements, as well as the support from the U.S. president and the opposition from the public."

"The trading logic for Tesla is, on one hand, electric vehicles, which have a tangible impact, but there are also many future expectations, such as autonomous driving and robotics, many of which are traded on expectations, so changes in expectations have a significant impact on stock prices," Wang Yi added.

For Berkshire Hathaway, Wang Yi gave a completely different evaluation. From the product design of Southern Eastern Ying, it can be seen that they "do not recommend shorting" this stock.

"This stock is likely to be one that can withstand bull and bear markets; it won't drop too much when it falls, at least it performs slightly better than the overall market, but it may also beat the S&P 500 when it rises," Wang Yi explained, which is precisely why they launched a double long rather than a short product.

Based on historical backtesting data, Wang Yi believes that "the double long on Berkshire is quite considerable," and investors can use this tool to "continuously enjoy its outperformance over the market." However, he also reminded investors that Buffett's age is an important variable that the market is paying attention to, which may affect future performance.

There are many risk events in the second quarter; how should investors respond?

In the first quarter, the global market has experienced dramatic changes, with Trump triggering a series of changes from tariffs to the Russia-Ukraine situation just two months after taking office. Wang Yi pointed out that the development of the Russia-Ukraine situation has become a key variable affecting the market, "because although we see good performance from Hengke this year and some bottom valuation recovery, many large foreign funds are still mainly trading themes in the U.S. and Europe, meaning funds are flowing from the U.S. to Europe."

There is a clear investment logic behind this transatlantic capital flow. Wang Yi explained: "The main trading logic in Europe is fiscal breakthroughs, with performance still okay and valuations relatively low, affected by negative factors from Russia-Ukraine." The market is closely watching the progress of Russia-Ukraine negotiations, especially regarding Germany's fiscal and defense-related issues, as "how much incremental growth defense stocks bring to Europe" has become a key focus for investors.

It is worth noting that although "many foreign investors have concentrated their expectations on European performance over the past year or this year," from a long-term perspective, market participants still believe that "if we extend the dimension to 3 to 5 years, the U.S. will outperform Europe." Current investment opportunities in Europe are more driven by short-term factors, including "capital repatriation, fiscal policies, and a ceasefire in Russia-Ukraine." However, Wang Yi also reminded that the European market has already seen significant gains, "though not as much as Hengke, the overall index performance has been quite good, mainly led by Germany."

In addition to the U.S. and European markets, Japan will also become a focus for investors in the second quarter. Wang Yi analyzed the unique challenges currently facing the Japanese market: "As the dollar weakens, the yen unexpectedly strengthens, and the yen has a very direct impact on the Nikkei, as over 50% of profits from Japanese listed companies come from overseas income.""This exchange rate fluctuation has put pressure on Japanese companies, leading to the conclusion that 'a stronger yen is not good news for these listed companies, and the Japanese stock market has performed relatively poorly this year.' This stands in stark contrast to the generally optimistic view of the market in the previous two years, as 'both the yen's movement and the Bank of Japan's hawkish stance have been relatively negative for the Japanese stock market this year.'

However, fundamental analysis shows that the Japanese economy still has resilience. Wang Yi pointed out: 'From a fundamental perspective, Japan is actually doing quite OK. It still has EPS recovery, inflation is still present, wage increases are reasonable, and the economy is still relatively OK.' Therefore, many international investment banks and foreign institutions believe that the current Japanese market may provide 'a decent opportunity for entry at lower levels.'

Regarding the Hong Kong and A-share markets, which are of greater concern to Asian investors, Wang Yi mentioned that the Hong Kong market has undergone valuation recovery, especially as 'some large internet companies' Capex has begun to replicate the development path of Mag7,' but this theme may have already been 'traded quite fully.'

Looking ahead, Wang Yi believes that the Hong Kong market needs new driving forces: 'From a valuation perspective, it was previously said that Hong Kong stocks had low valuations and were a value trap, but now the valuations have been repaired. What should be the next step?'

It is particularly noteworthy that as the valuation gap narrows, 'especially when the valuations of Mag7 or Nasdaq are almost comparable to yours, what will be the next breakthrough point?' In this regard, Wang Yi provided his judgment: 'I personally think that unless there is a real cash flow performance reflected in individual stock performance, it may be difficult to break through new highs, as the logic or sentiment is hard to sustain. Unless there is a more grand narrative.'

As for the A-share market, Wang Yi's view is relatively cautious: 'From the perspective of A-shares, I think it does not benefit from this round of AI; the only beneficiary may be the Shanghai 50, which is among the tech stocks. Therefore, our view on A-shares may not be as positive as that on Hong Kong stocks.'

How do you view the "grand narrative" that mainland funds are gradually taking over the pricing power of the Hong Kong market?

Wang Yi first confirmed that the scale of southbound funds has indeed reached an astonishing level. 'From the beginning of this year until now, if I remember correctly, it has approached HKD 400 billion, which is a very large number,' he pointed out. 'Last year, the total for the entire year was only about HKD 800 billion.'

This data indicates that in just the first quarter of 2025, the scale of mainland funds flowing into Hong Kong has already reached half of the total for the entire year of 2024. From a longer-term perspective, 'the total southbound funds since the launch of the Shanghai-Hong Kong Stock Connect have been about HKD 4 trillion,' Wang Yi added, highlighting the ongoing inflow trend of southbound funds.

In particular, 'the southbound funds have been quite substantial in the past two years, and the trading volume has also been large,' reflecting a significant increase in interest from mainland investors in the Hong Kong market, which is also the objective basis for the claim that 'domestic capital is taking over the pricing power of Hong Kong.'

Despite the large scale of southbound funds, Wang Yi believes it is premature to equate this with 'taking over pricing power.' He analyzed this from the dimensions of holdings and trading."In terms of position structure, we see that a large portion of Hong Kong stock holdings is still in foreign capital. Even though domestic capital has bought a lot, the overall holdings are still predominantly foreign. "This means that from the perspective of asset ownership, foreign capital still dominates the Hong Kong market."

As for trading activity, "from the perspective of trading or participation, the trading volume of southbound funds used to account for about ten percent, but now it may be around 20%-30%." This indicates that the participation of mainland funds in market trading activities has significantly increased and has become a force that cannot be ignored.

Wang Yi analyzes that although the influence of mainland funds in the Hong Kong market is indeed increasing and "has become a relatively important participating force," it will take some time to truly grasp market pricing power from a holding perspective.

Can the U.S. Economy Achieve "Detox"?

Just two months after Trump returned to the White House, the U.S. financial markets have already experienced significant volatility. Since the first quarter, the market has undergone a nearly 180-degree shift in attitude, from initial optimism to current concerns about stagflation. This shift is mainly due to the Trump administration's tough stance on reducing the fiscal deficit, aggressive tariff policies, and the concept of "American detox period" proposed by Treasury Secretary Mnuchin, which together have triggered a reassessment of the U.S. economic outlook.

Recently, after a significant adjustment, U.S. stocks have seen a certain degree of rebound, but investors are still pondering a core question: Can Trump's economic strategy achieve its grand goals? Can he complete the economic "detox" within 6 to 12 months and lead the U.S. back to the so-called "golden age"?

In this regard, Wang Yi believes that from a long-term perspective, some of Trump's policy orientations may have their rationality: "On one hand, he is concerned about the fiscal situation, and on the other hand, he is asking allies to take on more responsibility, whether in NATO, Europe, or extending to Japan and other regions."

However, Wang Yi points out that the key prerequisite for the success of Trump's policies may have changed: "If AI or the next generation of technological revolution still occurs in the U.S., then what he is doing may really succeed. But now it seems that the prerequisite has been broken." This means that "the idea that funds must be concentrated in the U.S. and that technological iteration must occur in the U.S. may no longer hold." In this case, many of Trump's policies "may face challenges in terms of being recognized by others or being forced upon others."

Through extensive communication with industry peers, foreign capital, and investment managers, Wang Yi found significant contradictions in Trump's policies:

"The primary demand of his supporters when he came to power was to reduce inflation, but he is actively promoting tariffs and a series of negotiations, even raising tariffs on Canada, Mexico, and even China, which are contradictory."

Deeper contradictions are also reflected in: "On one hand, he hopes everyone will invest in the U.S., attract FDI, buy U.S. Treasury bonds, invest in U.S. stocks, etc., but on the other hand, he wants to promote de-globalization through tariffs and various means. He wants the U.S. to remain attractive but does not want to increase the deficit."Wang Yi pointed out that Trump's policy framework significantly differs from the economic operating logic that the United States has formed over decades: "From a long-term perspective, who are people making money from? Isn't it from the United States? But if people gradually can’t make money from the United States anymore, will they look for new trading partners? If they find new trading partners, do they necessarily have to invest in the U.S. market? Not necessarily."

This rupture makes Trump's policies seem like "an outsider coming in needing to reorganize the entire situation," rather than making adjustments within the existing framework. Although the goal of restructuring government agencies and streamlining bloated organizations may have its rationale, Wang Yi believes "it is impossible to eliminate all identified issues in one go within 180 days as he claims; that is somewhat counterintuitive or illogical."

The biggest impact of Trump's policies on the market is not just short-term price fluctuations, but the long-term suppression of corporate investment willingness. Wang Yi reviewed the experiences from Trump's first term: "Trump's first term had a significant impact on U.S. Capex and even global Capex because at that time, people felt that policy uncertainty was quite strong, so companies were unwilling to invest."

This trend has reappeared in the current term: "In this term, we also see the same issue, not only in the U.S. but even in some places in Southeast Asia, companies, especially internet companies, are becoming conservative in their decision-making due to uncertainty about future U.S. tariff policies and local policy changes, leading them to abandon new investments."

Wang Yi concluded that the main impact of Trump's policies is "increased volatility without any benefits." Moreover, a conservative corporate investment attitude will have far-reaching implications: "The consequence of being conservative is that if companies do not invest, it is hard to imagine there will be high growth, unless they directly distribute dividends, which makes the entire logic difficult to predict."

Part 2

Why focus specifically on Berkshire, NVIDIA, Tesla, Coinbase, and MicroStrategy in product selection?

Wang Yi introduced that, referencing U.S. experience, Tesla and NVIDIA are the most popular targets in the U.S. market, making them natural choices.

Additionally, considering the high attention to virtual assets in the Hong Kong market, along with the Hong Kong Stock Exchange allowing products like Bitcoin spot ETFs, MicroStrategy and Coinbase, both closely related to virtual assets, were included in the first batch of products.

As a representative of value investing, Berkshire Hathaway, while not the hottest in U.S. leveraged inverse products, is viewed as a "symbolic company target" due to Buffett's high recognition and reputation in Asia.

This diversified selection strategy covers both high-growth technology and virtual asset sectors while also accommodating traditional value investment representatives, providing rich choices for investors with different risk preferences.

Why is it strange to see individual stocks and ETFs mentioned together, and why do such products exist?

In the investment market, the combination of "individual stocks" and "ETFs" may seem contradictory at first glance. ETFs are typically seen as tools for diversified investment, while individual stock investment represents concentrated bets.

Wang Yi, head of the quantitative investment department at Southern Eastern Asset Management, explained that the emergence of such products actually stems from the development of the investment ecosystem and market demand.

"Leveraged and inverse products for individual stocks are a natural extension of index leveraged products," Wang Yi stated. As investors' acceptance of index leveraged and inverse products increases, the market has gradually evolved to create high-leverage products targeting individual stocks. It is worth noting that regulatory requirements limit the leverage ratio, "The Hong Kong Securities and Futures Commission's regulations may allow a maximum of two times leverage, and the same applies to individual stock indices." This explains why the products issued this time do not have a three-times leverage version.

For individual investors, leveraging to go long or short on individual stocks has obvious limitations in traditional investment methods.

According to Wang Yi, in traditional investment, investors can achieve leveraged or short positions on indices through index futures, but there are no individual stock futures as investment targets in the U.S. market. To achieve leveraged investment in individual stocks, the main method is "to work with investment banks to create financial derivatives, namely swap contracts, to complete the entire leverage process."

The innovation of individual stock leveraged inverse ETFs lies in collaborating with investment banks, using swaps on NVIDIA, Tesla, and other stocks as underlying investments, and then packaging these complex financial derivatives, related legal contracts, operational valuations, and other issues into simple ETF products, significantly lowering the threshold for leveraged investment.

Wang Yi stated, "If individual investors want to short, borrowing stocks is very difficult; going long with leverage, achieving two or three times leverage is also not easy through financing. Even if brokers have financing ratios, individual stocks can only borrow a maximum of 30% or 40%, which may be the limit, but reaching two times leverage is not easy."

The Hong Kong market has long had leveraged financial products such as warrants and options, providing investors with avenues for leveraged investment. What distinguishes individual stock leveraged inverse ETFs from these products?

The warrant and options market in Hong Kong was once large in scale, becoming "one of the largest options and warrant markets in the world." These products provide investors with leveraged tools, but they also have significant limitations.

Wang Yi pointed out that a prominent feature of warrants and options products is that "their transparency is not as high as that of ETFs." This is mainly because the pricing mechanism for warrants or options involves various complex factors, including implied volatility and market maker quotes, leading to a process of forming the final trading price that is relatively opaque to ordinary investors.

In addition, warrant trading also has a certain level of complexity in operation. "On the trading level, it may be conducted in phases, and even if buying the same underlying asset, the stock code or warrant code needs to be refreshed continuously, causing a lot of operational trouble for investors," Wang Yi explained. The characteristic of these products being updated frequently requires investors to constantly pay attention to new product codes, increasing the difficulty of investment management.

Another major issue investors face with warrants and options products is liquidity risk. Wang Yi admitted, "When buying warrants or options, you don't know if you can sell them at market price." This uncertainty means that investors may face significant slippage or may not be able to execute trades at the expected price when closing positionsIn contrast, ETF products have significant advantages in trading mechanisms. "The assurance that ETFs provide is that they trade in the market, with transaction prices being relatively transparent and liquidity being visible," Wang Yi emphasized, noting that this transparency allows investors to better understand trading conditions.

In terms of liquidity, the scale effect of ETFs provides better assurance. Wang Yi illustrated, "For example, buying 1 million or 2 million shares, if the market transaction is 10 million or even 100 million, overall, it has little impact on the market and can be fully executed."

The superior liquidity and price discovery function of ETF products are largely attributed to the market maker mechanism behind them. Wang Yi explained, "ETFs are traded on exchanges, and there are many market makers involved behind the scenes, providing fairer quotes."

In the Hong Kong market, a close cooperative relationship has been established between ETF issuers and market makers. "In the local Hong Kong market, as a major issuer of ETFs, we maintain close relationships with various market makers and also guide them on ETF benchmark net values, estimated quotes, and how much spread to open," Wang Yi revealed. This cooperative mechanism ensures a close connection between market quotes and the underlying value of the products, providing certain assurances from both liquidity and bid-ask spread perspectives.

What are the differences and advantages compared to similar products traded in the U.S. market?

Wang Yi first pointed out that trading U.S. stock ETFs during the Asian session has a unique time window advantage, as the time zone difference brings an edge in information processing. "We are in Hong Kong time, and many events such as earnings reports and news, especially with Trump being quite active, often occur during the U.S. night or Asian trading hours." This means that Asian investors may react to this information earlier than U.S. investors.

"The discussions about AI triggered by Deepseek, the investment logic benchmarked against NVIDIA and the Magnificent Seven, are likely to see similar news or products emerge during the Asian session, which can significantly impact the performance or expected trends of the underlying assets." Additionally, important decisions made during the Asian session, such as those by the Bank of Japan, can also affect global liquidity, providing a unique perspective for trading U.S. stocks during Asian hours.

The leveraged inverse ETFs for U.S. stocks launched in Hong Kong have clear advantages in tax treatment. Wang Yi explained the tax complexities faced by similar products in the U.S.: "The dividend rates for U.S. individual stock leveraged inverse ETFs can be very high, which may seem strange since they are leveraged stock investments, why would they pay dividends?"

This peculiar phenomenon stems from the corporate structure of U.S. products. "If there is a significant accumulated increase by the end of the year, it will be treated as realized profit, and if dividends are not paid, taxes may be incurred." This structure forces U.S. ETFs to distribute a high proportion of dividends, "for instance, when MicroStrategy surged previously, the dividend yield could reach about 50%, which is quite exaggerated."

For investors, especially non-U.S. investors, this can lead to additional tax burdens. "Foreign investors purchasing U.S. leveraged inverse products also have to pay U.S. dividend taxes, which depend on the tax treaty with the U.S." For example, "in the South Korean market, the tax treaty stipulates that South Korea only pays 15% of U.S. dividend tax, while domestic U.S. investors have to pay 30%"In contrast, the products launched in Hong Kong are more flexible in structure. 'Our products, in terms of structure, do not need to be constrained by the necessity to pay dividends; theoretically, they may not pay dividends at all, which is a significant difference.' This feature allows investors to avoid unnecessary tax burdens.

Wang Yi also specifically mentioned the differences in trading stability. Trading U.S. stock products through night sessions heavily relies on the stability of individual broker-dealers. 'Take the well-known Blue Ocean incident, for example; it cut off trading. For those who needed to trade at night, when the night session was shut down, they could only stay up late to trade, which poses a risk for many investors.'

ETFs significantly reduce this risk. Wang Yi pointed out, 'Our products are listed on the Hong Kong Stock Exchange and do not rely on the service stability of any specific broker-dealer, which is a fundamental difference.'

Regarding concerns that poor liquidity in U.S. stock night sessions may lead to tracking deviations in ETFs, Wang Yi stated that there are mature solutions to this issue. 'Actually, there’s no need to worry. Just like many other U.S. stock products we operate, trading is actually conducted at the start time in the U.S.'

During Hong Kong trading hours, the price discovery mechanism is ensured by professional market makers. 'During Hong Kong trading hours, it is mainly maintained by market makers, who will also price these U.S. stock products based on longer trading hours for certain varieties, such as Nasdaq futures and night trading, ensuring that they trade within a reasonable range.'

The market mechanism will also automatically correct deviations. 'If the deviation is too large, they actually have arbitrage opportunities, which will bring the product closer to its fair value.' This ensures that the product price can reasonably reflect the value of the underlying assets, even during non-trading hours for U.S. stocks.

How to Ensure the Stability of Leveraged Inverse ETFs Tracking?

In the field of leveraged inverse ETF products, investors often question the stability of leverage, especially when observing deviations between the actual performance of certain U.S. stock leveraged inverse ETFs and their theoretical leverage multiples.

Wang Yi pointed out that understanding the performance of leveraged ETFs first requires clarifying a basic concept: 'The two times or three times leveraged inverse of individual stocks actually tracks two to three times the daily performance, but when viewed over a longer time frame, it may not necessarily be two times.'

This characteristic can be understood through specific numbers. Wang Yi explained, 'If NVIDIA rises by 10% today, then the product should theoretically perform at 20%, which can be tracked. However, on the second day, if the product's initial net value is 100, the net value on the second day should be 120, because of the two times return. If the product rises another 20% on the second day, it adds two times the performance on top of the 120.'

This compounding effect amplifies over time. 'Imagine it as a compounding leverage; it might have risen a total of 50% in a week, and leveraged products could have risen over 100%, even 120 or 130, because positions are compounded every day.' This explains why, when held long-term, investors may observe that the performance of leveraged products seems to 'exceed' the expected leverage multiples. Wang Yi added that this phenomenon 'also frequently occurs in other index-based two times Hang Seng and two times Hang Seng Index products.'"The second reason for the deviation of leveraged ETF performance from expected multiples comes from 'friction losses' caused by market volatility. 'In a volatile market, if it rises 10% today and falls 10% tomorrow, for individual stocks, it may seem that the stock price hasn't changed,' Wang Yi explained.

However, the performance of leveraged products is not zero: 'Leveraged inverse products increase positions at high levels, and when they fall, they add to their positions. If they fall too much, friction losses due to volatility will occur, and the performance may not be 0, but negative.' This phenomenon explains why holding leveraged products for the long term in a volatile market may lead to returns that underperform the leveraged multiples of the underlying assets.

The third factor affecting the stability of leverage is risk control measures under extreme market conditions. This issue is particularly prominent in high-leverage products. Wang Yi pointed out: 'For some performances, especially for individual stock leveraged inverses, like products with higher multiples, such as three times NVIDIA or three times Tesla, it is conceivable that if Tesla or NVIDIA performs extremely on a given day, the manager may need to take protective actions.'

Such protective measures are necessary because 'if an individual stock falls below 33%, the fund may experience negative net value, which fund managers definitely do not want to happen.' Therefore, managers will take proactive intervention measures: 'They will adjust positions and investment exposures. In the U.S., there have been instances where once a drop of around 20% occurs, they may start to reduce positions, resulting in missing out on subsequent rebounds.'

In the face of these challenges, the product design of Southern Eastern Ying has adopted two strategies to ensure leverage stability.

First, ensuring intraday tracking accuracy: 'From our product perspective, the first thing to ensure is that the daily performance is two times or -2 times, depending on the specific product.' This guarantees that short-term investors can achieve the expected leverage effect.

Second, choosing appropriate leverage multiples to reduce extreme risks: 'In terms of adjusting positions or actively adjusting exposure, two times is relatively appropriate because it is hard to say that a single-day drop exceeds 50%, so they won't consider whether to reduce positions when it drops 20%.' This conservative design can 'ensure that the fund does not experience so-called negative equity, that is, negative net value situations.'

What kind of investors are suitable for allocating individual stock leveraged inverse ETFs?

Wang Yi pointed out that individual stock leveraged inverse ETF products are mainly targeted at retail investors and some institutions with restrictions on investment derivatives.

Wang Yi emphasized that individual stock leveraged inverse ETFs 'are more trading-oriented products,' rather than long-term holding investment tools. This characteristic stems from the structural features and cost factors of the products themselves.

'Because the losses are relatively high, and now the U.S. dollar interest rates are also relatively high, holding a position with two times leverage incurs financing costs every day,' Wang Yi explained.

When can we expect leveraged inverse products for popular Chinese stocks like Tencent, Alibaba, and Xiaomi?

Wang Yi stated that the launch of leveraged inverse products in the Hong Kong market follows a gradually open regulatory path: 'Initially, only offshore index products were allowed, and after a period, local indices were opened to investors.'This gradual regulatory strategy aims to ensure the smooth operation of the market and accumulate sufficient experience before expanding the range of products. The development history of index products provides a regulatory reference model for individual stock products.

Based on past experience, Wang Yi predicts that the development path of leveraged inverse ETFs for individual stocks may be similar to that of index products: "First allow the issuance of overseas underlying assets, observe the overall operation or investor response for a period of time, and then introduce new policies at the appropriate time."

Although a specific timetable cannot be provided at present, Wang Yi stated that the industry holds a positive attitude towards the launch of leveraged inverse products for Hong Kong local stocks: "Of course, we also look forward to it. Tencent and Alibaba are among the most actively traded and largest local stocks in Hong Kong, and we hope to launch such products for investors as soon as possible."

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