The Goddess of Derivatives Talks

Goldman''s new recruit, Cheril Lee, explains why warrants are big business in HK.

Goldman Sachs recently hired Cheril Lee as executive director, responsible for developing the firm's warrants business in Asia ex-Japan. Known as the goddess of warrants, at 30 Lee is a bit young for deification; but the moniker fits.

Lee is a minor celebrity in Hong Kong - author of the Cantonese-language bestseller "Warrants 101", a radio commentator as popular as the fast-paced tension-filled horse-racing announcers who cover the local track, and a television personality (with a face for the movies; not radio) who has managed to turn derivatives into a hot topic that keeps viewers glued to the TV. Lee joins from SG Securities, where she was responsible for its equity derivatives and structured-products businesses in Asia ex-Japan.

It is quite clear that Goldman Sachs is keen on its catch: David Voon, managing director and head of structured products, Asia Ex-Japan, says: "Cheril is one of the most experienced and respected warrants specialists in Asia, particularly in Hong Kong. We're confident she will help Goldman Sachs advance its position in the Hong Kong market and across the region."

Warrants are certainly hot: Turnover in Hong Kong hit a record HK$325.3 billion ($41.8 billion) in the first six months of this year, up 32.4% from the same period last year. Meanwhile, the China Securities Regulatory Commission (CSRC) in Beijing has suggested the mainland stock exchanges may reintroduce warrants to the market again. They were available from 1992 to 1996, but abolished due to alleged abuse by speculators.

The "Tentative Methods for Warrant Transaction Managements of Shanghai Stock Exchange" was published recently, a sign that the mainland is gearing up for this market. The "tentative methods", published last week, includes provisions for avoiding and controlling risk and the qualifications of warrants to be listed on the market.

As China gets ready to enter this market, Goldman Sachs believes it is well positioned to take advantage of the new opportunities through the likes of Lee. She clearly lives and breathes her work, but not in a depressed "I work 24-hours a day" sort of way.

Her contagious excitement for the notion of structured products - she says she gets ideas for new covered warrants just by chatting with friends, answering questions from consumers, or simply out shopping - is envy inducing.

Warrants 101? Are we going to get a Warrants 201?

Lee: Actually, there are a lot of things that the readers generally do not know. The Hong Kong warrants market is the largest warrant market in the world. A lot of people are quite surprised by that because Hong Kong is a very small city compared to Europe or Japan but in Hong Kong the turnover is the largest worldwide.

And that's fairly recent?

From about 2003, 2004 up until today.

And do you think it's fair to say it's the betting habits of Hong Kong, which has propelled the market to this size?

I don't know how I should say this... (laughter) if you go into a casino you will see all these Chinese people there. I think it's the nature of people in Hong Kong.

Here, people look for short-term investments especially in geared products. Even for structured notes or guaranteed notes - in Europe they are selling for 10 years or even 15 years. Now compare that to Hong Kong where people are buying two-year and three-year notes.

For warrants it is the same. Most active warrants usually have a very short maturity. And Hong Kong warrants have a lot of gearing compared to other products. Hong Kong investors love geared products and they love short-term products and so that makes the warrant market very popular here.

So you've come to Goldman Sachs to build this business here?

Well yes, this is my top priority. I have nine-years of experience in the warrants industry; I come from SG Securities and... well, my strength is more on warrants.

Why do you like the derivatives market?

I really like this industry. I love warrants because they are very dynamic. There are a lot of changes - even for the same products, you can have a different play. For a bull market you can buy call warrants, for a bear market you can buy put warrants, for a range market you can buy high-geared warrants. So every day you can invest.

Compare that with equity trading where in a good time you can invest more, in a bad time you have to sit there and wait. You could short-sell, but that's not so popular in Hong Kong.

But for warrants everything is controlled by your head - everyday you can invest. So I really like this product.

Do you think the number of people who are going to invest in covered warrants will continue to grow?

I think so. Compared to several years ago, say five years ago or even ten years ago, usually people who invested in warrants were only professionals - either those who worked with professional warrant funds or the professional option traders. Now, when you look at newspapers, mostly Chinese newspapers, there are whole pages of warrants articles and columns and those are for the retail public.

And the latest warrant seminar I did in May 2005 had more than 3,000 retail investors show up. It was the largest warrant seminars ever in Hong Kong (and probably around the world). The retail investors really care about warrants.

Are you going to continue to do seminars, radio and television at Goldman Sachs?

Uhmmm... that's a secret (laughter). We'll do something, and we'll be the only one, the first one to do it. You know, I was the first one to go to radio to talk about warrants and people at that time thought I was crazy. I mean, who would listen to the radio to hear about warrants?

But actually, we saw the results immediately. When we talked about warrants, it was clear a lot of people didn't understand. So they would call up. They would ask questions and say they wanted to learn more about warrants.

So then we would hold a seminar for the retail public so that we could spend more time with the end-users. We would also hold two-day workshops - to teach from the basics, to how to trade like the professionals - and people were really eager to learn all the different trading techniques.

Now, almost all the issuers are following these marketing activities, so I think we'll need to do something creative again here at Goldman Sachs.

For example...?

Well, if I tell you now, it wouldn't be a secret. Actually, I have to discuss it with a lot of departments. I think the good thing about Goldman is that it is a very good investment bank, with an extensive institutional network . So I think we can do something different and we'll try to do something different... Goldman Sachs is a dominant player in many markets including Japan and some European countries.

For example, Goldman Sachs in Tokyo and Europe have some very advanced warrant trading systems, what I plan to do is to get all the best things here.

What are some interesting trends in the Hong Kong warrant market?

This is very different from the European market. In Europe the issue cost is usually very low, so people will just issue, say, 20 warrants today and tomorrow another 20 warrants, so they have about 50,000 warrants outstanding in the European market.

In Hong Kong, we broke a record last year with 1,300 warrants - well, actually, 1,298... But in comparison to last year, we still have a lot of warrants - because last year there were only 600-something warrants. But because the listing cost is so expensive, every time we issue a warrant we have to do a lot of studies asking: Okay, which one?

If there are 20 warrants, we are only going to choose one to issue because it's so expensive and because if there are too many warrants it becomes confusing. In the Hong Kong market there are mainly plain-vanilla warrants while in the European market there a lot more exotic warrants or commodity warrants.

We see that some of the houses try to import commodity warrants to Hong Kong, which work quite well in Europe but it doesn't work in the Hong Kong market. The reason is maybe because of the time difference - during the Asian time, this commodity may not move a lot, or in terms of gearing, it is not as high as those commodity-related stocks warrants. So we need to have different country experience, or technology, but it has to be suitable for the local tastes.

So roughly 1,300 mostly plain-vanilla warrants. Do you think that's too many? Too little?

A lot of issuers want to come to Hong Kong. These people know that it's a very big market. They know that Hong Kong still has room to grow because the pie is very big. We have China. There are more China plays here - for example if global investors want to play on China stocks, the H-shares, they can participate through the Hong Kong warrants market.

By looking at the size of the China market, there's still a lot of room to grow. But existing players and newcomers have to be committed to the market. Before, some banks would come here and not do any marketing, they would just issue the warrants, just put it on the board, and wait for people to trade, and I don't think that works.

How big is the China play?

It's growing. Compared to one year ago, it's very different. Before, HSCEI didn't have futures. If you wanted to do a China play, you could only play with the stocks. So at that time, I thought, what should we do? Investors were looking for the index-related products, but there were no futures for the issuers to hedge our risk. At last we did issue such a warrant. Looking forward, we will also be creative. When the market needs a new investment product, we will try to make it happen.