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IMPORTANT: Investment involves risks. Investment value may rise or fall. Past performance information presented is not indicative of future performance. Investors should refer to the Prospectus and the Product Key Facts Statement for further details, including product features and risk factors. Investors should not base on this material alone to make investment decisions.

CSOP Gold Futures Daily (2x) Leveraged Product (the “Product”) is a sub-fund of CSOP Leveraged and Inverse Series II, an umbrella unit trust established under Hong Kong law. Units of the Product (the “Units”) are traded in HKD on The Stock Exchange of Hong Kong Limited (the “SEHK”) like stocks. It is a futures-based product which invests directly in the Active Contracts (as defined in the sub-section “Roll Schedule” in the section “The Index” of the Sub-Fund’s Appendix in the Prospectus) of gold futures traded on the New York Commodity Exchange (COMEX) (“COMEX Gold Futures”) subject to the rolling strategy discussed below, to obtain the required exposure to the Index so as to give the Product twice (2x) the Daily performance of the Index. It is denominated in USD. Creations and redemptions are in USD only.
  • The Product is a derivative product and is not suitable for all investors. There is no guarantee of the repayment of principal. Therefore your investment in the Product may suffer substantial or total losses.
  • The Product will utilise leverage to achieve a Daily return equivalent to twice (2x) the return of the Index. Both gains and losses will be magnified. The risk of loss resulting from an investment in the Product in certain circumstances including a bear market will be substantially more than a fund that does not employ leverage.
  • The Product is a leveraged product investing directly in COMEX Gold Futures. The Product is the first product tracking the leveraged performance of a single commodity futures index in Hong Kong. The novelty of such a leveraged product makes the Product riskier than traditional exchange traded funds or products tracking the leveraged or inverse performance of equity indices.
  • The Product is not intended for holding longer than one day as the performance of the Product over a period longer than one day will very likely differ in amount and possibly direction from the leveraged performance of the Index over that same period (e.g. the loss may be more than twice the fall in the Index). The effect of compounding becomes more pronounced on the Product’s performance as the Index experiences volatility. With higher Index volatility, the deviation of the Product’s performance from the leveraged performance of the Index will increase, and the performance of the Product will generally be adversely affected. As a result of Daily rebalancing, the Index’s volatility and the effects of compounding of each day’s return over time, it is even possible that the Product will lose money over time while the Index’s performance increases or is flat.
  • There is no assurance that the Product can rebalance its portfolio on a Daily basis to achieve its investment objective. Market disruption, regulatory restrictions or extreme market volatility may adversely affect the Product’s ability to rebalance its portfolio.
  • The rebalancing activities of the Product typically take place near the end of trading of the underlying futures market to minimise tracking difference. As a result, the Product may be more exposed to the market conditions during a shorter interval and may be more subject to liquidity risk.
  • The Product is normally rebalanced at the end of trading of the COMEX Gold Futures on a Business Day. As such, return for investors that invest for period less than a full trading day will generally be greater than or less than two times (2x) leveraged investment exposure to the Index, depending upon the movement of the Index from the end of one trading day until the time of purchase.
  • Daily rebalancing of Product’s holdings causes a higher level of portfolio transactions than compared to the conventional exchange traded funds. High levels of transactions increase brokerage and other transaction costs.
  • Investment in futures contracts involves specific risks such as high volatility, leverage, rollover and margin risks. A “roll” occurs when an existing COMEX Gold Futures is about to expire and is replaced with another COMEX Gold Futures with a later expiration date. The value of the Product’s portfolio (and so the NAV per Unit) may be adversely affected by the cost of rolling positions forward as the COMEX Gold Futures approach expiry as the market for these COMEX Gold Futures is in contango. An extremely high degree of leverage is typical of a futures trading account. As a result, a relatively small price movement in a COMEX Gold Futures may result in a proportionally high impact and substantial losses to the Product, having a material adverse effect on the NAV. A futures transaction may result in significant losses in excess of the amount invested. Regarding the Product’s futures positions, relevant parties (such as clearing brokers, execution brokers, participating dealers and stock exchanges) may impose certain mandatory measures for risk management purpose under extreme market circumstances. These measures may include limiting the size and number of the Product’s futures positions and/or mandatory liquidation of part or all of the Product’s futures positions without advance notice to the Manager. In response to such mandatory measures, the Manager may have to take corresponding actions in the best interest of the Product’s Unitholders and in accordance with the Product’s constitutive documents, including suspension of creation of the Product’s units and/or secondary market trading, implementing alternative investment and/or hedging strategies and termination of the Product. These corresponding actions may have an adverse impact on the operation, secondary market trading, index-tracking ability and the NAV of the Product. While the Manager will endeavour to provide advance notice to investors regarding these actions to the extent possible, such advance notice may not be possible in some circumstances.
  • If the price of the COMEX Gold Futures included in the Product’s portfolio hit certain price limits, depending on the time of the day and the limit being reached, the trading of the COMEX Gold Futures may be limited within the set price limits, suspended for a short period of time, or suspended for the remainder of the trading day. This may affect the Product’s tracking of twice (2x) the Daily performance of the Index, and, if a trading halt takes place near the end of a trading day, may result in imperfect Daily rebalancing.
  • COMEX Gold Futures has an active limit of 3,000 net futures equivalent contracts that becomes effective at the close of trading on the business day prior to the First Notice Day (as defined in the Prospectus) of the delivery month. Accordingly, if the position held or controlled by the Manager reaches the relevant position limit or if the NAV of the Product grows significantly, the above restriction may prevent creations of Units due to the inability of the Product to acquire further COMEX Gold Futures. This may cause a divergence between the trading price of a Unit on the SEHK and the NAV per Unit. The investment exposure could also deviate from the target exposure which adds tracking error to the Product. The position limit may have adverse impact to the Product and may cause substantial loss to the Product.
  • The investments of the Product are concentrated in single active COMEX Gold Futures generally. This may result in large concentration risk. The value of the Product may be more volatile than that of a fund having a more diverse portfolio of investments and a product which holds futures contracts with different expiring months. The value of the Product may be more susceptible to adverse conditions in the gold market. There is no guarantee that the gold price, and the prices of COMEX Gold Futures will appreciate. The Product may experience greater volatility and may be adversely affected by the performance of industries and sectors or events related to gold and to its production and sale.
  • As the Index is based upon active COMEX Gold Futures but not on physical gold, the performance of the Index may substantially differ from the current market or spot price performance of gold. Accordingly, the Product may underperform twice (2x) the Daily performance of the spot price of gold bullion.
  • Payment of distributions out of capital or effectively out of capital amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment and may result in an immediate reduction in the NAV per Unit.
  • The Product is not “actively managed” and under normal market circumstances, the Manager will not adopt any temporary defensive position when the Index moves in an unfavourable direction. In such circumstances, Units of the Product will also decrease in value. Under extreme market circumstances, the Manager will adopt temporary defensive position for protection of the Product.
  • The trading price of the Units on the SEHK is driven by market factors such as the demand and supply of the Units. Units may trade at a substantial premium or discount to the NAV. As investors will pay certain charges (e.g. trading fees and brokerage fees) to buy or sell Units on the SEHK, investors may pay more than the NAV per Unit when buying Units on the SEHK, and may receive less than the NAV per Unit when selling Units on the SEHK.
  • The COMEX and the SEHK have different trading hours. The trading hours of COMEX are from 5:00 p.m. to 4:00 p.m. Central Time from Sunday to Friday with a 60-minute break each day at 4:00 p.m. Central Time while the trading hours of SEHK are from 9:30 a.m. to 4:00 p.m. (Hong Kong time) from Monday to Friday with a 60-minute break each day at 12:00 noon (Hong Kong time). As the COMEX may be open when Units in the Product are not traded and priced on SEHK, the value of the COMEX Gold Futures in the Product’s portfolio may change at times when investors will not be able to purchase or sell the Product’s Units. Difference in trading times between the COMEX and the SEHK may increase the level of premium/discount of the Unit price to its Net Asset Value.
  • Although the Manager will use its best endeavours to put in place arrangements so that at least one market maker will maintain a market for the Units and gives not less than three months’ notice prior to termination of the market making arrangement, liquidity in the market for the Units may be adversely affected if there is only one market maker for the Units. There is also no guarantee that any market making activity will be effective.
  • The Product may be subject to tracking error risk, which is the risk that its performance may not track that of the Daily leveraged performance of the Index exactly. This tracking error may result from the investment strategy used, high portfolio turnover, liquidity of the market and fees and expenses and the correlation between the performance of the Product and the two times (2x) Daily performance of the Index may be reduced. The Manager will monitor and seek to manage such risk in minimising tracking error. There can be no assurance of exact or identical replication of the leveraged performance of the Index at any time, including an intra-day basis.
  • Prices of the Product may be more volatile than conventional ETFs because of the daily rebalancing activities and the leverage effect.
  • The Product may be terminated early under certain circumstances, for example, where there is no market maker, the Index is no longer available for benchmarking or if the size of the Product falls below USD10 million. Investors may not be able to recover their investments and suffer a loss when the Product is terminated.
  • Investors should note that all Units will receive distributions in the Base Currency (USD) only. In the event that the relevant Unitholder has no USD account, the Unitholder may have to bear the fees and charges associated with the conversion of such distribution from USD to HKD or any other currency. The Unitholder may also have to bear bank or financial institution fees and charges associated with the handling of the distribution payment. Unitholders are advised to check with their brokers regarding arrangements for distributions.
Please note that the above listed investment risks are not exhaustive and investors should read the Prospectus in detail before making any investment decision.

What is CSOP Gold Futures Daily (2x) Leveraged Product?
CSOP Gold Futures Daily (2x) Leveraged Product (the “Product”) (stock code: 7299.HK) is a futures-based product which invests directly in the Active Contracts of gold futures traded on the New York Commodity Exchange (COMEX) to give the Product twice (2x) the Daily performance of the Solactive Gold 1-Day Rolling Futures Index (the “Index”). The Product does not seek to achieve its stated investment objective over a period greater than one day. The Index consists of only gold futures whose price movements may deviate significantly from the gold spot price. The Product does not seek to deliver a leveraged return of gold spot price.
NAV1* =
No more than 20% will
will be used as margin to acquire
gold futures traded on the New York
Commodity Exchange (COMEX)
(“COMEX Gold Futures”)
+
Not less than 80% USD and other USD
denominated investment products

1 The investment strategy of the Product is subject to the investment and borrowing restrictions set out in Part 1 of the Product’s Prospectus.

* Under exceptional circumstances (e.g. increased margin requirement by the exchange in extreme market turbulence), the margin requirement may increase substantially and as a result the percentages may vary proportionately. Please refer to the Product’s Prospectus for details.

Why invest in gold


In the past 20 years, cumulative gold spot price achieved an average annualized return of 9.32%, outperformed SSE Composite Index, average annualized return of 3.6%, Hang Seng Index (HSI Index), average annualized return of 1.49%, and S&P 500 Index, average annualized return of 3.48%, during the same period.
Meanwhile, the average annualized return of cumulative daily two times gold spot price reached 15.96%.

Gold 1x*, Gold 2x**, SSE Composite Index, HSI Index, S&P500 Index performance in the past 20 years2

Precious metal investment


Gold 1x, Gold 2x, SSE Composite Index, HSI Index, S&P500 Index performance in the past 20 years3

Gold price Gold price daily two times SSE Composite Index HSI Index S&P500 Index
Average Annualized Return 9.32% 15.96% 3.60% 1.49% 3.48%

* Gold 1x: gold spot price

** Gold 2x: two times gold spot price

2,3 Bloomberg

The investment objective of the CSOP Gold Futures Daily (2x) Leveraged Product (the “Product”) is to provide investment results that, before fees and expenses, closely correspond to twice (2x) the Daily performance of the Solactive Gold 1-Day Rolling Futures Index (the “Index”). The Index consists of only gold futures whose price movements may deviate significantly from the gold spot price. The Product does not seek to deliver a leveraged return of gold spot price.


Financial protection during uncertainties


Gold can be used as financial protection during market uncertainties, such as financial crisis, trade war disputes and COVID-19 epidemics.
Through the major recessions in the past 20 years, the return* of gold unexceptionally beat that of many other major assets—US stocks, US treasuries, commodities, hedge funds and A-shares, considerably.
The cumulative return of daily two times gold price outperformed the return of gold spot price significantly.

Gold 2x performance in crisis 4

market instability

* Return: Cumulative gold spot price return

4 Bloomberg, US Stocks: S&P500 Index; US Treasuries: Bloomberg Barclays US Treasury Total Return Index; Commodities: S&P GSCI Commodity Index; Hedge Funds: Credit Suisse Hedge Fund Index; A-Shares: Shanghai Composite Index

The investment objective of the CSOP Gold Futures Daily (2x) Leveraged Product (the “Product”) is to provide investment results that, before fees and expenses, closely correspond to twice (2x) the Daily performance of the Solactive Gold 1-Day Rolling Futures Index (the “Index”). The Index consists of only gold futures whose price movements may deviate significantly from the gold spot price. The Product does not seek to deliver a leveraged return of gold spot price.


Hedge against inflation


In the monetary easing environment, gold can be used to hedge against the inflation and deflation risks. In the low-medium rate environment, gold can deliver decent return to investors. According to historical data, gold delivered average monthly return of 1.2% in negative real rate environment*.
The daily two times of gold price can amplify the return during the low-negative rate period.

Gold performance in various real rate environments^5
Avg. monthly return

hedge against inflation

* Return: cumulative gold spot price return

^ Based on nominal gold monthly returns between January 1971 and November 2019. Real interest rate regimes based on the 12-month constant maturity US T-bill minus the corresponding y-o-y CPI inflation.

5 Bureau of Labor Statistics, Federal Reserve, ICE Benchmark Administration, World Gold Council

The investment objective of the CSOP Gold Futures Daily (2x) Leveraged Product (the “Product”) is to provide investment results that, before fees and expenses, closely correspond to twice (2x) the Daily performance of the Solactive Gold 1-Day Rolling Futures Index (the “Index”). The Index consists of only gold futures whose price movements may deviate significantly from the gold spot price. The Product does not seek to deliver a leveraged return of gold spot price.


Portfolio diversifier


Gold has remarkably low correlation with other assets e.g.0.00 with China Policy bond, 0.03 with US equity and 0.10 with HK Deposit6.

Gold correlations with other assets 7

Precious metal investment

Adding gold into the investment portfolio can significantly enhance the return while lower the risks. For example, in a portfolio that is made up of 60% A-share and 40% China Policy Bond, by replacing 5% of A-Shares with a simulated strategy offering gold daily 2 times performance, the cumulative return of the portfolio increases 12% meanwhile the risk of the portfolio measured by standard deviation decreases. With the same portfolio, when 10% of A-share is replaced by the same strategy to deliver gold daily 2 times performance, all else holds constant, the cumulative return of the portfolio almost doubles while the risk of the portfolio decreased further. Therefore, the daily two times of gold price can enable investors to use less capital to diversify investment portfolios.


Gold as a portfolio diversifier8

monetary easing environment

6 Note: > +0.7: high correlation, < +0.3: weak or low correlation

7 Bloomberg, monthly return, 2000.Jan – 2020.March; FTSE A50: FTSE China A50 Index; ; Emerging equity: MSCI Emerging Net Total Return USD Index; HK equity: Hang Seng Index;; US equity: S&P500 Index; ; China Policy Bond: Bloomberg Barclays China Treasury + Policy Bank Total Return Index; Hedge Funds: Credit Suisse Hedge Fund Index; HK Deposit: HKD HIBOR 3 Months;

8 Bloomberg, monthly rebalancing, 2008.Jan – 2020.Mar. The figures are for illustrative purpose only. Not indicative of actual return likely to be achieved.A Shares: FTSE China A50 Index; China Policy Bond: Bloomberg Barclays China Treasury + Policy Bank Total Return Index CNY; Gold 2X: 2 times of gold spot price (with compounding effect before cost)

The investment objective of the CSOP Gold Futures Daily (2x) Leveraged Product (the “Product”) is to provide investment results that, before fees and expenses, closely correspond to twice (2x) the Daily performance of the Solactive Gold 1-Day Rolling Futures Index (the “Index”). The Index consists of only gold futures whose price movements may deviate significantly from the gold spot price. The Product does not seek to deliver a leveraged return of gold spot price.

Difference between physicals gold – backed ETF vs CSOP Gold Futures Daily (2x) Leveraged Product

Physically-backed gold ETFs hold physical gold designed to back up the value of shares issued, while futures-based gold ETFs use futures to provide exposure without any physical holdings.

Physical gold – backed ETF CSOP Gold Futures Daily (2x) Leveraged Product
Underlying assets Physical gold COMEX Gold Futures + cash (USD) + other USD denominated investment products, such as deposits with banks in Hong Kong and USD denominated short-term investment-grade bonds (i.e. maturity less than 3 years) and SFC authorised money market funds in accordance with the requirements of the Code on Unit Trusts and Mutual Funds 9
Performance Gold spot price 2x performance of the Index
Difference between gold spot price & futures price
  • The spot price of commodity is the actual price for immediate delivery of the commodity
  • The futures price can be more or less than the spot price at any given moments as it locks in the cost of a future delivery of the commodity
The future price of commodity = the spot price of commodity + costs of carrying the commodity (storage, financing insurance and etc.) + market expectation on the future trend of the commodity price

Unlike Oil futures, the gold futures price only slightly deviates from gold spot price. The reasons are

  1. gold is precious mental with limit size and easy to store, the costs of carrying gold account for a small part in the price of gold futures
  2. Besides, the supply and demand of gold is relatively stable thus market expectation on the gold price in future is consistent and stable
  3. In conclusion, the minimal carrying costs and consistent market expectation will not deviate the gold futures price from the spot price by a large marginal


The below chart shows the historical difference between gold spot price and COMEX Gold Futures price 10

COMEX Gold

9 Yield in USD from such cash and investment products will be used to meet the Product’s fees and expenses and after deduction of such fees and expenses the remainder will be distributed by the Manager to the Unitholders in USD

10 Bloomberg

The investment objective of the CSOP Gold Futures Daily (2x) Leveraged Product (the “Product”) is to provide investment results that, before fees and expenses, closely correspond to twice (2x) the Daily performance of the Solactive Gold 1-Day Rolling Futures Index (the “Index”). The Index consists of only gold futures whose price movements may deviate significantly from the gold spot price. The Product does not seek to deliver a leveraged return of gold spot price.

When investing in the CSOP Gold Futures Daily (2x) Leveraged Product, investor should be aware of the contango risk and compounding risk

Contango risk occurs when futures rolling is carried.

In order to closely replicate the gold price performance while minimize the contango cost, the CSOP Gold Futures Daily (2x) Leveraged Product will carry out 5 roll-overs from gold Active Contract to the gold Next Active Contract each calendar year to continuously deliver the gold performance in accordance with the roll schedule elaborated in the Prospectus.

Example:
If a fund holds 1000 gold contracts at $1700 and must roll to the contract of the following period, which is priced at $1800, it will not be able to buy the same number of contracts. Because of that, the exposure to gold will be diminished.

Compounding risk indicates the Product’s performance may not track twice the accumulative Index return over a period greater than 1 Business Day.

The following scenarios illustrate how the Product’s performance may deviate from that of the accumulative Index return (2x) over a longer period of time in various market conditions. All the scenarios are based on a hypothetical $100 investment in the Product11.

Scenario 1: Upward trending market
In a continuous upward trend, where the Index rises steadily for more than 1 Business Day, the Product’s accumulated return will be greater than twice the accumulative Index gain.

Index daily return Index level Index accumulative return Leveraged (2X) product Daily return Leveraged (2X) product NAV Leveraged (2X) product accumulative return 2x of Index accumulative return Difference
Day 0 100.00 100.00
Day 1 10% 110.00 10% 20% 120.00 20% 20% 0%
Day 2 10% 121.00 21% 20% 144.00 44% 42% 2%
Day 3 10% 133.10 33% 20% 172.80 73% 66% 7%
Day 4 10% 146.41 46% 20% 207.36 107% 93% 15%

Gold ETF

Scenario 2: Downward trending market
In a continuous downward trend, where the Index falls steadily for more than 1 Business Day, the Product’s accumulated loss will be less than twice the accumulative Index loss

Index daily return Index level Index accumulative return Leveraged (2x) product Daily return Leveraged (2x) product NAV Leveraged (2x) product accumulative return 2x of Index accumulative return Difference
Day 0 100.00 100.00
Day 1 -10% 90.00 -10% -20% 80.00 -20% -20% 0%
Day 2 -10% 81.00 -19% -20% 64.00 -36% -38% 2%
Day 3 -10% 72.90 -27% -20% 51.20 -49% -54% 5%
Day 4 -10% 65.61 -34% -20% 40.96 -59% -69% 10%

Gold Market

Scenario 3: Volatile market
In a volatile market, where the Index generally moves downward over a period longer than 1 Business Day but with daily volatility, the Product’s performance may be adversely affected in that the Product’s performance may fall short of twice the accumulative Index return

Index daily return Index level Index accumulative return Leveraged (2x) product Daily return Leveraged (2x) product NAV Leveraged (2x) product accumulative return 2x of Index accumulative return Difference
Day 0 100.00 100.00
Day 1 10% 110.00 10% 20% 120.00 20% 20% 0%
Day 2 -10% 99.00 -1% -20% 96.00 -4% -2% -2%
Day 3 10% 108.90 9% 20% 115.20 15% 18% -3%
Day 4 -15% 92.57 -7% -30% 80.64 -19% -15% -4%

Gold Trading

As illustrated in the graphs and the tables, the accumulative performance of the Product is not equal to twice the accumulative performance of the Index over a period longer than 1 Business Day.

11 CSOP research