China Rolls Out Small-Cap Derivatives, Boosts Hedging

A man walks by an electronic display showing the Shanghai stock index, in Shanghai, on September 24, 2021. Photo: Aly Song, Reuters.

Derivatives based on China’s small-cap CSI 1000 Index began trading in Shanghai on Friday, boosting hedging options for fund managers.

The futures and options that debuted on the China Financial Futures Exchange (CFFEX) offer tools to manage risks in a portfolio of about 1,000 small tech firms.

Four exchange-traded funds (ETFs) tracking the CSI 1000 also launched on Friday, seeking to raise 8 billion yuan ($1.18 billion) each.

In the hedge fund space, two products tracking the index and seeking enhanced returns were created this month, according to the fund association.

“The new derivatives will likely boost investors’ confidence to hold small caps,” Chen Hongting, an option investment manager at Trading Art Association, said.

Volatile Small Stocks

Previously, investors were reluctant to buy volatile small stocks in the absence of effective hedging tools, Chen added.

More strategies based on the CSI 1000 Index futures and options are expected to emerge, potentially increasing the size and liquidity of CSI 1000 Index ETFs, according to Guosheng Securities.

China’s securities regulator said on Monday that launching CSI 1000 Index futures and options is a key step toward deepening capital market reforms, and can help further satisfy investors’ need to hedge risk.

It is an especially welcome development for China’s rapidly growing hedge fund industry, which builds various quantitative strategies with the use of derivatives.

Global hedge fund houses include Bridgewater, Winton, Man Group and Two Sigma have all entered China’s market.

The four ETFs launched on Friday are managed by E Fund Management Co, China Universal Asset Management Co, Fullgoal Fund Management Co, and GF Fund Management Co.

A Channel for Small-Cap Stocks

“The ETFs can bring more money into those growth companies and offer retail investors a channel to buy small-cap stocks,” said Ade Chen, general manager of Fund Investment.

He also said his firm is going to find arbitrage opportunities using the CSI 1000 Index futures, as higher volatility in small caps potentially generates higher returns for his strategy.

Previously, the CFFEX only had three types of stock index futures products, tracking the mega-cap SSE50 Index, the blue-chip CSI300 Index and the small-cap CSI500 Index, respectively.

Fund managers can also design structured products based on the new derivatives, or use them as hedging tools in the so-called market neutral strategy, Zhang Chao, an analyst said at a GF Fund Management roadshow.

Reuters with additional editing by Jim Pollard

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Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd papers in Sydney, Perth, London and Melbourne before travelling through SE Asia in the late 90s. He was a senior editor at The Nation for 17+ years and has a family in Bangkok.