US ETF firm plans Hong Kong presence

Oct 25, 2012

Inverse and leveraged exchange-traded funds specialist Direxion is preparing to market its products to institutions in the territory, indicate sources.

New York-based exchange-traded funds firm Direxion plans to obtain a licence and put a sales presence in Hong Kong, say sources, in a move that may herald the spread of more complex ETFs in the region.

Managing $6.2 billion in assets as of September 30, Direxion targets institutional clients with its 47-strong range of inverse and leveraged ETFs. The firm declined to comment for this article.

It is believed to be the next in a line of Western ETF providers eyeing Asia as a growth market, despite the difficulties posed by the region in terms of regulation, achieving scale and so on.

Direxion is the 13th largest ETF manager in the US by AUM, but it ranks sixth by average daily volume (ADV), with $1.75 billion in September, according to UK-based ETF Global Insight. Two of its products are regularly in the top 10 ETFs in the US by ADV, notes a banker in Asia.

In Asia-Pacific, inverse and leveraged ETFs are only permitted in Australia, Japan and South Korea, and have proved particularly popular in the latter country. However, it may be some time before these products can be listed in the other two main Asian ETF markets, Hong Kong and Singapore.

As a result, Direxion cannot access the retail market or list products in either of the latter two jurisdictions, for the time being at least. But that should not prove a major issue, since the company targets institutions and other professional investors rather than the retail segment.

Direxion had initially considered focusing its efforts on Singapore. Sylvia Jablonski, who runs international business development, visited exchange executives, regulators, distributors and ETF users in the city state earlier this year, say sources. However, it seems the firm has decided to target Hong Kong, at least initially.

Its product range includes leveraged ETFs as niche as the Daily Gold Miners Bull 3x Shares and Bear 3x Shares and Daily Semiconductor Bull 3x Shares and Bear 3x Shares.

Restricting inverse and leveraged ETFs to professional investors is to be expected, says the banking source. “You do need a fair bit of skill to get the timing right with these type of products. [A typical approach is to] buy in the morning, sell four hours later and don’t hold overnight. That’s what they’re designed for.

“For professionals in the market, they can deliver fantastic results if you get it right,” he adds. “You can make an enormous amount of money very quickly.

“There are a number of people in the business who think it’s time to allow some professional development of this specialist product set locally," says the banker. "But the question is how you do that, because listing locally means you open them to retail investors.”

Some ETF providers argue that it is too early to introduce more complex products such as these to the Asian markets, but many investors and managers would like to see the fund range expand along these lines.

Note: See the ETFs and Indices special report that will accompany the upcoming issue of AsianInvestor magazine for a series of features on the market in Asia.