Parallel to the downturn of hedge funds in the US, Hong Kong’s most weathly and not-so-wealthy have been hit hard by a couple of structured products: the “accumulator” and the “mini-bonds”.
The accumulators are sold to wealthy individuals and are defined here by an earlier article in the WSJ:
Called an “accumulator,” it is essentially a contract that obliges investors to purchase a security, currency or commodity at a fixed price — often set at a discount to prevailing market rates — at regular intervals. When the market price is above the fixed purchase price, the investor makes money. When it falls below the fixed price, the investor loses, sometimes quite a lot. Contract terms typically last a year.
It is a structured derivative product that was originally conceived in the UK for corporate use (so companies can acquire shares in another without moving stock price up significantly). Similarly to the Hedge Funds, these accumulators ar losely regulated by the HK SEC-equivalent as long as they are sold to people with HKD8mn+ in assets, which is equivalent to US$1mn. Approximately $25bn have been poured into these risky products, according to various sources. Investors can reap up to 31% ROI, but risking losses of more than 100%.
The mini-bonds, on the other hand, were sold to the masses. The Economist has a nice summary here with the definition:
These were typically securities that yielded 5-7%, at a time when banks paid less than 1% for deposits, and were guaranteed by Lehman but had staggeringly complex underlying structures tied to collateralised debt obligations (CDOs) of numerous financial institutions.
These mini-bonds are smaller in scale, with estimated investment value totalling US$1.6bn. The return promised was above bank interest rates (which was at 1%), but no where near the upside of the accumulator. From my own experience at Hong Kong retail banks, I can imagine that these instruments were sold without proper understanding of the risks. Who can really understand CDO risks when even Greenspan was shocked to see how it played out?!
