Hong Kong’s 2x SK Hynix ETF Raises Options Cap to 49%, With Fund Costs Seen Reaching 40% of NAV

CSOP Asset Management, the Hong Kong firm behind the blockbuster leveraged SK Hynix exchange-traded fund, has raised the product’s options allocation limit to 49% from 40% for the $14.4 billion ETF. The move does not mean the fund will buy more SK Hynix shares directly. Instead, it increases the scope for options exposure, which could sharply lift derivatives costs.

Bloomberg and other media outlets reported on June 22 that CSOP said in a statement issued a day earlier that, starting June 23, the fund can invest as much as 49% of its net asset value in options tied to SK Hynix.

The ETF had already lifted its SK Hynix options limit to 40% from 25% in May. It raised the ceiling again a month later.

The fund, launched in October last year, aims to deliver twice the daily return of SK Hynix shares. After drawing global investors, it grew within eight months into the largest ETF listed in Hong Kong and the world’s largest single-stock leveraged ETF.

The fund holds little SK Hynix stock directly. Instead, it seeks 2x daily exposure through swap agreements with global investment banks and by buying options. Fund documents dated June 10 show that as much as 80% of the fund’s assets can be invested in customized swap contracts.

Global banks have recently raised fees sharply on new swap contracts linked to SK Hynix shares. That reflects rising demand for swaps on the stock, along with concern that the size of clients’ leveraged exposure and the stock’s volatility could strain the banks’ own balance sheets.

Bloomberg reported that the asset manager increased the limit even as most global investment banks have been cutting clients’ leveraged positions ahead of possible adjustments. Greater use of options could worsen tracking error for the SK Hynix ETF and amplify downside risk.

Heavier use of options would also raise costs for investors, on top of adding market volatility. Under the new limit, the cost of swap and options positions could climb to as much as 40% of net asset value, up from 36%. In other words, as much as 40% of the fund’s NAV could be eroded by options costs alone, regardless of whether returns rise above or fall below an investor’s entry point.

The firm has warned investors that it may suspend the creation of new fund units if counterparties reach contractual limits and can no longer provide additional swap or options exposure.

It also said that if new unit creation becomes impossible, the ETF could trade at a substantial premium or discount to net asset value, widening the gap from its targeted leveraged return.

SK Hynix’s rally has helped make the Kospi the world’s best-performing stock index this year. SK Hynix rose 5.6% on the day, lifting its market capitalization to 208.04 trillion won, surpassing Samsung Electronics’ 206.67 trillion won, excluding preferred shares, to become South Korea’s most valuable listed company.

Kim Jung-a, contributing reporter at Hankyung.com, kja@hankyung.com