Hong Kong Investors’ portfolio was damaged by accumulators
According to Bloomberg on November 4, Asian regulators may curb all derivative products in their market soon after losses helped push the South Korean won to a decade low, led to lawsuits in India and caused shares of China's Citic Pacific Ltd. to collapse. The Wall Street Journal today wrote that accumulator -- one of derivative products –- is now wreaking havoc on private portfolios and corporate balance sheets.
Accumulator as a corporate product was from Europe. It was designed primarily for companies looking to build stakes in one another without causing sudden spikes in the share price of the target company. The Accumulators were spread widen in Asia when private bankers began marketing the product to retail investors as the Asian market proved a lucrative source of new business.
How a stock accumulator works (Click the image to enlarge)
Image courtesy of WSJ
Huge volatility in the recent global financial markets has been wreaking havoc on private portfolios and corporate balance sheets. Among the hardest-hit victims have been wealthy individual, or "retail," investors who bought stock accumulators in Hong Kong, by far the biggest market for the product, according to bankers. Hong Kong's financial regulator, the Securities and Futures Commission, estimated earlier this year that about $23 billion in accumulators remained outstanding.
As a result, recent losses from stock accumulators in Hong Kong have led to dozens of complaints to regulators and legislators from disgruntled investors. But contrarily, many of investors didn’t fully understand the risk or blame their private bankers for pushing them into the products. Some individuals he has talked to have lost as much as $25 million. While Citic Pacific Ltd., a Chinese-backed conglomerate listed in Hong Kong, recently reported a possible loss of nearly $2 billion.
Some investors have settled quietly for undisclosed sums with their private banks, according to people familiar with those negotiations. Others have opted to cut losses and terminate the accumulators, by selling them back to private banks for far less than their original purchase prices. Still others are hanging on to those investments, hoping a market rebound will restore ailing account balances.
Here is how an accumulator might have worked for an investor interested in accumulating a large position in China Mobile, one of the country's biggest telecom stocks.
A year ago, China Mobile was trading around 142 Hong Kong dollars (US$18.32) a share. An accumulator might have offered investors the ability to buy 1,000 China Mobile shares every month for a price of HK$114, or 20% below market price. The contracts typically included a "knock-out" clause, which terminated the contract once the stock appreciated 5%, or in China Mobile's case reached HK$149. If the stock reached that level, the return on the investor's outlay was 31%.
But here's the rub: Investors were contractually obliged to keep purchasing the shares at HK$114 regardless of whether they rose or fell. There was another nasty twist: Many accumulators required investors to double down on purchases if shares dropped, buying 2,000 shares instead of 1,000 at a price that now put them in the red.
For the 12-month accumulator, set in November 2007, investors quickly found themselves in this situation, as China Mobile's stock bounced around in the market's volatility. On Wednesday, the company's shares closed at HK$71.60 -- down 37% from the HK$114 purchase price. And because the investor is locked into making more purchases over the life of the contract, he keeps adding to his losses with each purchase.
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Sources :
The Wall Street Journal: Asian Investors 'Accumulate' Big Losses on Risky Contracts, November 6, 2008 |
