JPMorgan enters HK retail structured products market

The bank's Power Strategy model exploits capital flows as drivers of Hong KongÆs equity markets.
JPMorgan has launched three new structured products in Asia, including its first ever retail structured funds in Hong Kong.

The two Power Strategy funds on offer in Hong Kong aim to track the upside of the stock exchangeÆs two most popular indices û the benchmark Hang Seng Index and Hang SengÆs H-share index û while also protecting investors from downturns.

They do this by exploiting the idea that Hong KongÆs equity market is driven by capital flows into and out of the territory. When capital flows out, says JPMorgan, the indices will fall. When it flows in, they will rise.

So, the model will either buy or sell the indices at the end of each business day in Hong Kong, depending on the direction that capital is flowing. The Hong Kong dollarÆs peg to the US dollar means that capital flows will be implicitly reflected in the spread between interbank offer rates in Hong Kong and London.

ôThe model is based on historical indications of a strong negative correlation between the gain and losses of the index and the differential of the Hibor and Libor rates,ö according to the fundsÆ prospectus.

When the model generates a strong buy signal it will allocate up to 100% of the fundÆs net asset value to buying exposure to the index or, in the case of a sell signal, it will recommend as little as zero exposure. The portion of the fundsÆ assets that are not exposed to the indices will be held in cash, earning the overnight deposit rate.

Both funds are open-ended and set up under EuropeÆs Ucits III legal framework. The initial public offering closes on June 18, with a minimum investment amount of HK$5,000 and a subscription fee of up to 5%. The management fee is currently up to 1.95% a year.

The third product JPMorgan is launching is a structured note on offer to investors in Singapore. The AsiaConfidence Notes are linked to benchmark equity indices in Malaysia, Taiwan, Thailand and Singapore. In keeping with the mildly bearish mood, the notes offer a fixed minimum coupon of 7.5% a year so long as none of the indices fall by more than 50%. They will redeem early if all of the indices are above their starting levels on any of the quarterly observation dates.

In other words, the notes are aimed at investors who think regional indices are likely to remain relatively flat. They have a two-and-a-half year maturity and are on offer until June 20, with a minimum investment amount of S$50,000.
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