The double Hai Rishi ETF once again loosens the cap on options! After a "rapid expansion", alternative options are gradually showing a "double-edged sword".

Southbound East England Asset Management Ltd. (CSOP Asset Management Ltd.) announced that it will further increase the options usage limit of its SK Hynix leveraged Exchange-Traded Fund (ETF) with an AUM of $14.4 billion to give the manager greater operational flexibility to deal with the sharp rise in the stock price of the South Korean chip giant. The fund aims to achieve twice the daily stock return of SK Hynix. According to an announcement released by Southbound East England last Sunday, starting from Tuesday, the fund can use up to 49% of its net asset value for options investment, up from the previous limit of 40%, which was already raised from 25% in May this year. Southbound East England stated in the announcement that this adjustment takes into account the continuous expansion of the ETF's size and "unpredictable market fluctuations," aiming to ensure the sustainability and stability of the fund's operation and enhance its flexibility in acquiring exposure to the underlying stock. This adjustment is the latest indication of market institutions adjusting their strategies in response to the soaring stock price of SK Hynix. The stock has risen by over 340% year-to-date, prompting several investment banks to impose restrictions on clients' leveraged bets to guard against the risk of a significant pullback. Previously, the fund mainly obtained exposure to SK Hynix through swap contracts. As the swap channels tighten, options have become an alternative tool. Since its launch in October last year, the fund has seen rapid growth in size. According to compiled data, its assets increased by $4.8 billion in just the past week alone, making it one of the largest ETF products in terms of assets under management on the Hong Kong stock exchange. Analyst Rebecca Sin pointed out that the increase in options usage could exacerbate the tracking error of the fund on SK Hynix. She wrote in a report last week that a widening tracking error would amplify investors' downside risk. Therefore, in a market downturn, actual losses may exceed expectations. Global banks have significantly raised financing rates for new SK Hynix swap contracts with clients due to concerns about the size of clients' leveraged exposure and the volatility of the stock price potentially endangering their balance sheets. According to a fund document dated June 10, the fund can invest up to 80% of its assets in customized swap contracts. In addition to increased tracking error, the higher usage of options may also increase the fund's costs. The announcement last Sunday showed that under the new investment restrictions, the expected costs of swap and options investments could rise from 36% to a maximum of 40% of the net asset value. These costs will ultimately be passed on to shareholders, eroding their net returns. Also worth noting is the liquidity risk. Southbound East England has warned multiple times that if trading counterparties reach their limit and can no longer provide additional swap and options contracts to the fund, the creation of new units for the fund may have to be suspended. The fund also cautioned that the inability to create new units would lead to a significant premium or discount relative to the net asset value and significantly widen the performance gap between the leveraged returns of the underlying stock. Currently, SK Hynix's surge has not only attracted attention to the semiconductor sector but also directly propelled the South Korean KOSPI index to become one of the best performing global indices year-to-date. The stock holds a weightage of 28% in the KOSPI, and its trends have a significant impact on the South Korean capital market and global technology supply chain sentiment. This rally is mainly driven by the surge in demand for artificial intelligence (AI) storage chips, but the rapid rise in stock prices has also raised high alertness among regulators and financial institutions about the overheating of leveraged trading. For Hong Kong investors, this move by Southbound East England reflects not only the popularity of leveraged products in a bull market but also warns of the complexity and potential costs of derivative strategies in extreme market conditions.