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Hong Kong Stock Fall May Boost Sales of Accumulators, PwC Says

Declines in Hong Kong’s stocks recently may prompt investors to buy a risky type of structured product known as an accumulator to capitalize on any eventual rebound in share prices, according to PricewaterhouseCoopers.

Most accumulators, which effectively involve investors selling put options, in Hong Kong are tied to the city’s stocks, according to Chern Lu, head of market risk management for Asia at PwC. The company provides advisory services in areas including derivatives and structured products. The Hang Seng Index has dropped 9.6 percent in the last two months to 20,501.19 as of 12:05 p.m. in Hong Kong today.

Investors may “buy at this dip, then wait for the market to rebound, and pocket the easy money,” Lu wrote in an e-mailed response to questions yesterday.

Accumulators mandate the holders periodically buy a certain amount of the underlying stocks at set prices, typically at discounts, usually over one year or less. While rises would benefit holders, Lu warned the contracts are sometimes called “kill you later” investments in Hong Kong because the buyers can suffer losses at maturity if stocks plunge.

Generally, the sellers of accumulators can redeem them before their maturities if the linked shares climb beyond a certain level, limiting gains for the holders. Conversely, losses for the investors can snowball because some contracts force them to purchase multiple times the specified amounts of equities when the stocks fall.

“Accumulators are very risky derivative products,” Lu said. “The investor’s gain is capped at a certain level but the extent of his financial loss is bottomless, which naturally presents an unfair risk-return profile for the investor.”

While the market for accumulators has shrunk since the 2008 crisis led to losses, it has mounted a “surprising comeback,” with average daily volumes rebounding to as much as $500 million from $130 million in 2009 and 2010, Lu said.

High-net-worth individuals who have at least $3 million in investable assets or at least $1 million under investment firms’ management are the main buyers, according to the Hong Kong Monetary Authority.

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