Snowball bursts! The people who are cheated are all rich?

On January 17, a screenshot of a WeChat chat went viral on social media.

According to the pictures posted on the Internet, a "Mr. Tang" was told: "The duration of the CSI 500 Index snowball on January 13, 2022 that you participated in is 24 months, and today (January 15, 2024) is the expiration date of the product, the starting price of the starting price is 7097.76, and the closing price of the CSI 500 Index today is 5193.3, because the margin rate of the contract is 25%, and the ending price is more than 25% lower than the opening price (a decrease of -26.83%) Therefore, there is no principal and coupon of 2 million yuan of your investment this time. Please note that the settlement notice will be sent after it is received. ”

After learning that the principal of 2 million yuan was gone, the "Mr. Tang" in the screenshot just replied with a "um" word. Its calmness has also become popular on social media.

According to Caijing, the so-called snowball product is a kind of financial product linked to over-the-counter options, and the linked over-the-counter options contain individual stocks and indexes, among which the CSI 500 index and CSI 1000 index options are the most mainstream, and these two varieties have good liquidity, so they are selected as the linked target by most of the snowball products.

The reason why it is called "snowball" is because of the income characteristics of snowball options, as long as the linked target does not fall sharply and the holding period is longer, the absolute return of snowball products will be more and more, just like a snowball.

Snowball products are mainly sold to accredited investors. The main management institutions of such products are qualified private equity funds, etc., and the purchase channels may come from financial institutions such as securities firms, trusts, and wealth management subsidiaries of banks.

A brokerage account manager told Caijing that since OTC options are not open to individual investors, individual investors must participate in OTC options through the product model, as for the participation threshold of snowball products, the current private direct sales product channel is 1 million yuan, and the brokerage asset management channel needs 10 million yuan. Therefore, the amount of investment by a single investor in this type of product is often large, which is easy to attract market attention.

Han Qian, a professor at Lingnan College of Sun Yat-sen University, told Caijing that Xueqiu generally refers to exotic option products with obstacle clauses issued by brokers, and its income structure depends on the relationship between the price of the underlying asset and the upper limit (i.e., knock-out price) and lower limit (i.e., knock-in price) set by the product. As long as the price of the underlying asset breaks through the upper limit or fluctuates between the upper and lower limits, investors can get the corresponding coupon, but if the price of the underlying asset falls below the lower limit, losses may occur.

The income of Xueqiu products is mainly derived from coupon income, and its general annualized yield is 12% to 15%. In most cases, investors receive coupon income. Only when the underlying index falls sharply and breaks through the knock-in price level (i.e. the safety cushion) set by the product, the snowball product will cause investors to lose. The knock-in behavior will cause the snowball product to trigger the hedging operation of selling stock index futures, so if a large-scale snowball product knock-in occurs, it will trigger the sale of large-scale stock index futures, which will be passed on to the spot market and cause the index to continue to decline.

Taking the one-year snowball product of "80% of the knock-in price, 103% of the knock-out price, 15% of the yield and linked to the CSI 500 Index" of 1 million yuan purchased by investors as an example, the income is divided into the following types:

The first scenario is: if the CSI 500 Index rises by more than 3% at any point in the year, the knockout is triggered, the product is terminated early, and the investor obtains an annualized rate of return of 15% converted during the duration of the period;

The second scenario is that if the index falls below the 80% price line, triggering a knock-in, but rises by more than 103% within a year, the investor can still get an annualized return of 15%. Therefore, triggering the knock-in does not mean that the actual loss occurs, but it is necessary to continue to observe the subsequent performance of the linked target;

The third scenario is: if the index has been hovering in the price range of 80%-103%, investors can still get an annualized return of 15%;

The fourth scenario is: if the index falls below 80% first, and then only rises to between 100% and 103%, the investor can get back the principal;

The fifth scenario is: if the index falls below 80% and fails to rise back to 100% in the later period, the investor faces a loss of principal, and the loss is the magnitude of the index decline.

Why did the "Mr. Tang" in the aforementioned case lose all the principal? The reason is that he used leverage. Snowballs are divided into 100% Full Margin Snowballs and Limit Loss Snowballs. In layman's terms, the former has no leverage, while the latter does. If Mr. Tang buys a product with 100% margin, then his biggest loss is also the largest loss of the CSI 500 Index, that is, 26%. But Mr. Tang added 4 times leverage, and leveraged 8 million yuan with a principal of 2 million yuan, so his biggest loss was 26%×4, that is, 104%, losing all the principal.

This case reminds investors that for investors who have purchased a snowball with a limit on loss, there is a risk of losing all principal and interest.

Xueqiu products are not the first in China, they were born overseas, and have a history of 20 years. As of 2021, there are about 45,000 Xueqiu products in existence overseas, with a nominal principal of US$360 billion. The product is very popular among investors in overseas markets in the era of low interest rates.

In China, at the end of 2017, domestic brokerages created the first "snowball" product, and since then, the product has gradually entered major brokerages, private equity and wealth companies. In recent years, Xueqiu products have attracted more and more attention from the market due to their high income, and their scale has been rising. But when the market is weakening, the tail risks of this product are gradually revealed.

"Snowball products have been previously sought after, mainly because Xueqiu can receive fixed income coupons of 12% to 15% per annum when the lower limit has not been breached, which is attractive in the current situation of declining returns on various assets. In addition, the snowball products issued by some brokerages have several times leverage, which magnifies the yield of the snowball. In the previous small wave of bull market, brokerages and investors have made money, so Xueqiu has become a popular product sought after by investors. But people ignore the tail risks inherent in the product. Han Qian said.

A brokerage source told Caijing, "The customers of Xueqiu products are mainly high-net-worth individuals, which were sought after from 2018 to 2021, but from 2022, the growth rate will slow down." In the past two years, the snowball business of some brokerages has been in a state of loss. ”

"For brokers, the core of Xueqiu to make money is the bull market, constantly knocking out, because the snowball strategy is to earn the basis by knocking out; if it is not a bull market, then Xueqiu is actually equivalent to buying insurance, not making money. Han Qian explained.

(Source: China Securities News, Finance and Economics)