Since the beginning of this year
with the continuous decline of the A-share market
a large number of financial products called "snowballs"
suddenly appeared on the market
and went through forced liquidation
This not only caused
a large number of high-net-worth individuals to lose their money
but also became
an impetus for market decline
This mysterious product called snowball
many of you may have never heard of it before.
The media has not reported much about it before
but it is a favorite investment item for many rich people.
In the past few years, they have made a lot of money through it.
In China, there are more than 100 billion issuances every year,
and similar structured products
have reached
an annual issuance scale of $2 trillion globally
Today
let's look at it from a more professional perspective
why this strange,
complexly structured
with high risk and high return
is favored by the rich.
Why Snowball is facing liquidation this year
and why it has become an accomplice in driving the market down.
This Chinese New Year and wish everyone a good year ahead
Let’s talk about these products
Actually, Lin has dealt with it to some extent before.
It may be a bit complicated in some parts
but I also recommend that everyone listen patiently
because it does involves a lot of
mathematics and technical details
So when I was preparing,
I also wanted to avoid those complicated things as much as possible
and pick out the lower-level ones,
such as the game, human nature
But I'll give you a heads up
there are some professional things that I really can’t avoid and
if I were to skip them all then it's not very rigor
so I thought of a trick
Once I talk
about more professional content,
on this position of the screen
there'll be a notice
to serve as a reminder.
So if you see this light on,
you will probably know that this may be a professional thing.
Even if you don’t understand it, it doesn’t matter.
Or you can just ship ahead
Alright, let's start
First, we have to be clear about one thing
This Snowballs product we are talking about
has nothing to do
with the Snowball media.
Many of my friends are still confused.
Has this Snowball becomes so impactful
that they can create such a complicated product
and stirred up the market?
No, it’s just the same name.
Let’s get back to the subject.
Snowballs is a
Structured Product
are not new
They appeared in the United States in the 1980s.
What is it essentially ?
It’s basically a bond
plus a DIY financial gift package.
Bonds are easy to understand. It’s almost like depositing money in a bank.
You’ll get interest on a regular basis
and you’ll get your principal back when it matures.
And this structured product
means that on the basis of this bond,
it will also be linked to some indicators such as stock index, foreign exchange
interest rate, etc.
What does it mean?
Normal bonds pay interest
but for this structured product
When the stock index rises to a certain point
your profit will be blablabla.
If your stock loses to a certain point
your profit will be...
That's what it means.
Why would someone make a product so complicated?
Or
why would someone buy such a complicated product?
We know that
for most ordinary investors,
there are not many objects they can invest in.
In the secondary market are mainly stocks and bonds
some investors wonder
it’s too risky to invest in stocks.
you may lose everything if you are not careful
but if you want to invest in bonds,
the interest rate is only 3% - 4% per year
is not very interesting.
Is there any compromise plan?
I want higher interest than these bonds
but I don’t want to take risks as big as the stock market.
Many investment banks or securities firms have a group of people
called Structurers
they probably studied Mathematics, Physics, bunch of PhDs
They just say,
sir, no problem
We can meet your needs.
just let us know what kind of product you want
through my professional knowledge, I can package all the products for you
and give you a quotation.
For example, if you don’t want to participate in the returns of the stock market,
then I can provide you with such a product.
There is no interest after you buy it
but after 3 years
However high the S&P 500 rises, I will give you that much
30% cap.
For example, if you buy this product for 1 million,
if the S&P 500 rises by 20% in three years
you will get 1.2 million.
What if the S&P 500 falls?
doesn't matter, you won't make a loss
you can still get your 1 million back
but there's no interest for those 3 years
This is a relatively simple
structured product that is bullish on the S&P 500.
The yield chart looks like this
When the stock market rises, you make money and
protect your capital when the stock market falls.
Those of you with some financial knowledge
may look at this curve and say,
isn’t this a combination of call options?
Yes, you have seen the essence of the problem.
This is why I mentioned in the beginning
structured products is essentially a bond
plus a financial gift package.
In this example, the gift package is a combination of two options
But this is actually just the
simplest structured product.
Actually, most structured products
are more complicated than this.
For example, it can look like this
or this
and there are some products that may be more complicated.
For example, I don’t want to just link to the S&P 500
because I'm more expert
I may have my own opinions on many stocks
Let me give you an example of this kind of structured product that
is very popular in the United States.
For example, it tracks 3 stocks
Apple, JPMorgan Chase, and Tesla at the same time
In the next 3 years
will look at the performance of these 3 stocks
if the best performer among the three
does not fall by more than 30%,
you can get a very high yield
say 35%
Then 3 years later
if the one with the best performer of the three
does not fall for more than 30%
you can get all your capital back.
If the one with the best performance falls by more than 30%
then you will lose as much as it falls
Does it sound complicated?
It's alright, you don't have to think about it
I just want to give you an example to tell you
that it can be very complex
And whatever you want it to be
they can do it for you.
Example like this is more complicated
it is not just a combination
of few options stocks
You need Structurer to define the price
and then assemble the parts.
This structured product
can also have many weird structures
For example, it will look at
the path a stock has taken over time
or it will have a capital-guaranteed shield
or there are the kinds that
will redeem it for you halfway through, etc.
But no matter how it is DIY,
what the investors are actually pursuing
is that to take more risks
to increase expected yield
Generally speaking, the higher the risk you take, the
higher the yield you will get.
For example, in the example of the three stocks we just mentioned
by taking on extremely high risks
you get that 35% interest.
How are structured products generally sold?
Overseas banks or investment banks,
such as Goldman Sachs, Citi Group, Barclays, etc.
or domestic securities firms
will regularly issue such structured products
using their own credit as guarantee
and then these products will be sold to
high-net-worth investors through channels
such as private banks and securities firms.
Why is it only sold to high-net-worth investors?
Because these products generally have higher risks
and are special,
so their starting investment threshold is very high,
In Europe and the United States, it may be $1 million.
or few hundred millions
In China
it may range from 1 million to 100 million yuan
to buy this product.
For example, some of you with high-net-worth
your private banking manager may call you
and say Sir, this is the latest
structured bonds issued by Goldman Sachs
The rate will be 18%.
Sounds good? Okay buy 1 million
then the account manager
go to Goldman Sachs to place an order of 1 million
Sometimes it is specifically for large clients
such as buying more than $5 million at a time,
Most of these investment banks
will help you DIY according to your preferences.
For example, Mr. Wang didn’t like
these issued products after seeing them,
so he said, I hope the rate
will reach at least 20 %
Go and DIY it for me,
and then Goldman Sachs may
issue a globally unique
$10 million structured bond to Mr. Wang
Because these structured products
involve a variety of risks, they
can be said to be the most complex products.
So you see, the groups responsible for issuing such structured products
in investment banks are so busy that
they are running around all day long.
Half of the time, they are not in their seat and
have to talk to the groups responsible for trading and sales in the secondary market.
He has to connect with different groups
because he has to DIY
he needs to be familiar with the parts
how the market is performing,
what the client's needs are, etc.
Although this structured product originated in the United States,
it has always been
quite tepid in the market
There's a very important reason, do you know what it is?
Because in the United States, there is a regulatory requirement
that investors who
want to invest in very complex financial products
must sign a
100-page risk disclosure document
saying that I have fully understood
and fully knew the risks involved,
For investors who are not very professional
letting them go through a thick document
and ask them to be fully aware of all that
they will be worried
It scared off many non-professional investors in the United States
from buying these products.
Therefore, these structured products
were very popular in Europe in the early days
and in the past ten years, they have moved to Asia and become the main battlefield.
In the past two years, about two to three trillion
are issued globally every year
You must be wondering
why is it that despite trillion-dollar issuance every year
only a few people have heard of it?
I think one of the main reasons
is that its audience
is high-net-worth individual investors
First, high-net-worth exclude the vast majority of people
and it is aimed at individual investors
which means that most professional institutions
do not touch this product.
So you rarely see any research reports on this
This is also why
this complex and magical financial product
is hidden
in this financial sea.
As for why
professional investors don’t buy this product,
we will talk about it later when we discuss it in depth.
You see, although it is collectively called structure.
If you listen to what we just talked about
do you feel that it is like a
product that you can do whatever you want?
It is very flexible,
so different market environments
will generate different popular structures
What is it called?
The environment creates demand.
Demand creates products
For example, the U.S. stock market
has soared in the past ten years.
Investors definitely don’t like to buy fixed-income products
so what is popular is the kind that gives up
part or even all of the interest
as long as the capital is reserved
but I want to get greater benefits from the growth of US stocks.
Of course, I will insert that
US stocks as the underlying product.
you don’t have to be an American to buy it.
As we just said,
it is actually tepid in the United States,
Europe and Asia Investors
can also buy products that target U.S. stocks.
For those that target European or Asian stocks,
you can see that in the past decade or so before the epidemic,
none of the major stock indexes were able to beat
U.S. stocks, which is in sharp contrast to U.S. stocks.
Therefore, investors in these markets may think that
the rise is not that high
and there might not be a fall
so they will prefer
taking a certain risk in exchange for a higher rate,
As long as the stock doesn't plummet
just give me 10% interest every year.
Products like this are income-enhancing products .
A very important and popular product
among these products
is Snowballs.
Finally, we talk about Snowballs.
It has been popular in Asia recent years.
Let’s first talk about what is Snowballs
It is not difficult to understand, but it’s very fragmentary.
So if you don’t want to know what it is
you can just drag the progress bar and skip ahead.
Let’s take a look at a typical snowball product.
It’s actually like a bond,
paying you a 15% rate with maturity period of 2 years
It’s also linked to the CSI 500 Index
because it's linked
so it generates two very critical points.
The knock-out price and the knock-in price
for example
103% and 75% of the initial price respectively.
For example, the CSI 500 was initially 5,000 points
The knock-out price is 5,150 points, and
the knock-in price is 3,750 points.
It's like doing a math question
Why are these two points so important?
In the next 2 years,
the CSI 500 index is going to be volatile
Once these two points are crossed,
major changes will happen.
Let’s discuss them now
Let's first talk about the higher knock-out price.
We will look at the CSI 500 Index once a month.
Once it exceeds 5150 points in any month,
it will be knocked out.
At this time, the contract will expire immediately
and you will get your principal back.
in addition to the annual interest of 15%,
for example, if it is knocked out in six months,
you will get your principal plus 7.5%.
If it is knocked out in two years,
you will get the principal plus 30% .
This mechanism
is a bit like a button that automatically ends
as soon as the stock rises, the contract expires immediately.
It's also called an Autocallable product
In fact, this mechanism
is a very common mechanism in structured products.
Well, the second case is in the two years,
the CSI 500 has been moving within these two lines.
didn't touch any of them.
When it matures,
you can get your principal back plus all the rates
which is 30%
The third situation is in the next two years.
When the closing price on any day is lower than the line below
at 3750
it means that the contract has been knocked in.
in the next two years, don't you check it once a month?
if it never rises back to the knock-out price,
this situation is quite miserable
It is equivalent to
buying the CSI 500 index directly.
After two years, you will lose as much as the CSI 500 falls.
For example, after two years, if the CSI 500 loses 10%,
you can only get back 90% of the principal.
If the CSI 500 falls by 40%,
you can only get back 60% of the principal.
In the last case
suppose that the CSI 500 falls below the entry price
but it rises back in the past two years.
and reach the knock out price again
then everything becomes good
the contract will expire immediately,
and you can still get 15% of the annualized return plus the principal.
In other words, among these four situations, only the third one
which is when the CSI 500 falls below 25% and has not risen back.
In this case, you will be in a worse situation.
Although the remaining three types have different expiration times
but you'll receive an annualized return of 15%,
so it is actually quite good.
In fact, many snowball products in the market is
the same as the four scenarios we mentioned, with added touch
but you just need to understand that
as long as the snowball does not fall sharply on the underlying stock index,
investors will get a very considerable interest yield
but once it falls sharply, investors will face serious loss
Those of you with some basic in derivatives would notice
that buying a snowball product
is actually equivalent to selling a put option.
Yes,
it can be said to be an exotic option
but broadly speaking you are selling a put option
to bet that the stock market will not plummet in exchange for a higher rate
It is an investment that has a high probability of making a small amount of money
but a small probability of losing a large amount of money.
Look at the A-shares plummeting this time, and
there are many snowball investors.
Isn’t it obvious that losing money
is the event that has a small probability of losing a lot of money
But there is still a problem.
we can understand losing money
but why you hear a lot of people liquidating their positions?
The problem is that there are a lot of investors
may add three or four times leverage
to buy Snowball products in exchange for higher returns.
If leverage is added,
assuming the CSI 500 falls below the knock-in price,
the brokerage firm may immediately ask you to make compensation.
If you can't make up the deposit or don't want to
it's basically equivalent to losing every penny
which is what we often call a liquidation.
You see this is a WeChat screenshot,
an account manager
telling a man named Mr. Tang
the CSI 500 has fallen below
the price of the snowball product he bought,
which exceeds his 25% margin
so the 2 million principal and rate
you invested this time are zero
Then Mr. Tang only sent a word
um.
I guess behind this simple word
is Mr. Tang’s silent cry.
We just saw the specific structure of this Snowball product
and we know why these people lost so miserably.
But this is definitely not the whole story.
The key is the financial market is connected everywhere
this bizarre product worth hundreds of billions.
will in turn push the market and make it continue to fall.
Note that
it may be a bit more difficult to understand from here on.
Put down the thing on hand
Actually investors lose money, especially individual investors
those high-net-worth investors who lose money.
although it is very miserable
in short-term
it will not have a particularly big impact on the market.
What I’m talking about is short-term.
Those who issue these products, such as investment banks and securities companies,
will conduct a large number of hedging operations at all times
based on market fluctuations.
Imagine you are an investor
no matter what kind of Snowball
Candy Ball. Cotton ball issued by a securities company
all your profits or losses
are signed with this brokerage.
That is to say, all the profits you face
are completely opposite to this brokerage.
How much you make is how much they lose, and how much you lose is how much they make
Some people may say
if investors have suffered such losses
the stock market has plummeted, wouldn't they earn a lot?
That's not how it is
Because it is impossible for the securities companies to take such a large risk
on their own to enter into this agreement with investors.
In theory, they have
to hedge in the market to remove most of the risk.
They are financial service provider, right?
They provide financial services
so they mainly makes money by taking commissions.
They can't be making money by betting against clients, right?
Let's look from the perspective of a brokerage firm
What risks does they face
when issuing a Snowball product?
Before they enter the market, the Delta
that is the risk to the stock index,
is about like this. This light is on.
Okay
Let's analyze this chart in the next three hours.
To be honest, we won't be able to talk understand this in just 2 or 3 sentences
Let’s just listen and try to get an idea
Look at this sharp point like a nail.
It is very obvious and abrupt, right
The problem lies here.
What does it mean?
That is, when the snowball was first released,
brokers needed to buy some underlying stock index futures
for hedging.
Then the risk that brokers faced
was that as the market fluctuated, it was constantly changing.
The more stocks fell, the more brokers had to buy
broker keeps buying as it keeps falling
When the stock rises, the broker will have to sell.
This is the logic of the broker in hedging
So if it keeps going up and down in this small range,
the broker will buy low and sell high and buy low and sell high
to achieve yield from this fluctuation.
But once the stock index falls below the knock-in price,
the broker's Delta will instantly turn around and rise.
At this time, the broker will
sell a large amount of the underlying stock index futures.
In short,
all you need to know is
that once the stock falls below entry price
the brokerage needs to sell a large amount of stock index futures
to hedge its own risks.
Isn't it amazing?
Do you suddenly feel that you understand?
Doesn't that add fuel to the fire?
So it will greatly increase the volatility of the stock market.
This product is simply too terrible.
Your understanding is correct, but it’s not deep enough.
Didn’t we just say
that when the stock index is falling
but has not yet fallen below the entry point,
the brokerage firm will not sell
instead it will buy stock index futures?
This operation is actually reducing market fluctuations.
So under normal circumstances,
when the market is flooded with various snowball products with different maturities
different structures
and different entry points,
even if the stock market falls,
some brokers are buying and some are selling, right?
The effect will be offset,
but this is obviously not the case this time.
Most of the domestic snowball products are listed on
CSI 500 or CSI 1000.
At the beginning of 2023, there was a surge in A shares
and the CSI 500 at that time reached
about 6,500 points
What does sharp rise meant for the Snowball product?
It ended early after being struck,
so there were a large number of investors at that time.
almost at the same time,
bought the Snowball product again
at a similar point
around 6000 to 6500
The entry point correspond to that
is 75%
within the 4500 to 4875 range
This is exactly at the point at the beginning of this year.
What does it mean?
It means that there are a large number of brokers
who need to sell CSI 500 futures at the same time,
which intensifies the decline of the stock market.
You see, this is the range since the beginning of this year.
Some of the major stock indexes
CSI 500 and CSI 1000
have fallen more than the CSI 300 and the Shanghai Stock Exchange.
Futures have also seen a relatively large fall
The big driving force here
is the hedging of securities companies with Snowball products.
The name "Snowball" originally means that your profits
will snowball like a snowball.
Who knew that this time,
the number of people who have liquidated their positions will snowball like a snowball
Of course, let me make it clear that
this stock market crash
does not mean that Snowball is the culprit here.
It’s not that big and it’s not that capable.
We can’t just dump this shit
on one person’s head, right?
The best it can do is make the two stock indexes
fall even harder.
In fact, this is not the first time that
snowball products knock in in large scale
It only became popular
in mainland China in about 2017.
Before that, do you know who like to buy snowballs the most?
The Koreans.
Why?
Because Korea has always been in a
relatively low interest rate environment
and the stock market
has been very boring for a long time
This made Korean investors at that time
in urgent need of high-rate
and very exciting products like Snowballs
And this Snowball generally needs to be linked to a
stock with relatively high volatility
so that the rate will be more attractive.
At that time, the volatility of the Korean stock market was not good
so ,many European, especially French, investment banks
packaged the stock index of the Hong Kong stock market into a snowball.
It was then sold to South Korea
As a result, the Hong Kong stock market
staged a market similar to the A-share market like this time.
First, there was a sharp rise.
The large number of snowball products were knocked-out
Many investors bought it again
but after a few months,
the stock plummeted by about 50%
and all the stocks were knocked in
European investment bank had to sell and sell to hedge.
Not only the investors in Hong Kong stocks suffered huge losses,
but also the snowballs investors in South Korea.
and European investment banks who are even further
also lost billions of dollars.
However, these international investment banks
did not stop because of the huge losses they suffered this time
Especially when the epidemic first hit the world in 2020
The stock market has plummeted
so the global snowball products are wailing again.
You must be wondering
why don't they learn from mistake
How come the securities companies are still issuing stocks after falling again and again?
It's not because they make money
although the plummeting will make these investment banks have suffered a lot of losses in the short term,
but in fact, most of the time, this snowball product
is very profitable for securities firms and investment banks.
The issuance department of this structured product
is one of the departments
with the highest returns
Take Natixis as an example.
They can earn hundreds of millions of euros a year
just by issuing snowball products
And issuing this snowball product
is equivalent to helping the investment bank and securities firm raise funds
because it is equivalent to issuing bonds, right
although the volume is relatively not very large
but this financing method
is very comfortable for investment banks and securities firms.
Therefore in recent years
the volume of structured products such as Snowball has also continued to grow.
Finally, let’s just talk about
structured products.
First of all, I want to say one thing
Many investors didn’t realize when
they bought this structured product
This product is really, really expensive.
You’ve also seen how complicated
this structured product can be, right?
The Snowballs
it doesn't seem complicated in those scenarios
but if you look at it from the perspective of a financial product risk
it is really complicated to the point of explosion.
There are all kinds of correlation risks
volatility risks, volatility risks, slope risks, etc.
So how do brokers generally hedge?
The most basic one is to hedge the Delta.
When the market matures, it will also hedge another volatility,
which is Vega
The remaining messy risks
they may not hedge at all
so they can only swallow them themselves.
What does swallowing correspond to?
It is to charge higher commissions from investors.
How high will this fee generally be?
I will give you an approximate
Asian data is not that complete
but in the European and American markets,
a more complicated structured product
will charge you an annual fee of about 2% to 3%.
These commissions are
usually added to this basis
by a hedging fee of a few percent.
What does this mean?
For example, a structured product
the broker's model may calculate
a rate of 20%
but after deducting various commissions and hedging costs,
the rate may be only 15%.
This is not an exaggeration
Didn't we dig a hole earlier
why those profesional investment institutions
don't buy this thing
It is because it's too expensive.
I have to have demand for it, right?
I'm a professional investor
so wouldn't it be over if I DIY the parts myself?
Why should I pay such a high commission
to buy it from an investment bank?
Of course, this doesn’t mean that investment banks and brokers are shady businesses.
They have indeed taken on such a big risk.
If investors want to buy such a complex product,
they have such high costs.
The stock handling fee is low, right?
buy you don't like it right
In fact, this principle is very normal in daily life.
If you buy an assembled bicycle and it can still run
it is not much more expensive than buying all the parts combined
It's just that the bicycle
you can see all the parts on that bicycle.
But you can’t see or understand this structured product.
So you can't say that those investors that buy this structured products
are being cheated on because it's expensive
It cannot be
because these investors
want such a complex product
and at the same time they don’t know those financial derivative
They can't assemble the bicycle by themselves
so they can only choose to pay the cost.
Note that
the price of financial product
and its ability to yield interest
are different things
It can make money even it's expensive, and lose money if it's cheap
You buy stocks with low handling fees,
it doesn’t mean that the stocks will rise, right?
As for whether this structured product is profitable or not,
that is not the scope of our discussion today.
Well
seeing that this structured product is so expensive,
why are there still people buying it?
It's because most investors don't know that it is expensive
Basically,
they are ordinary investors.
Their expectations, judgments, and feelings
deviate from the results calculated by
the brokerage model.
The more complex the structure, the bigger the deviation will be
the more space there is in the middle.
Let me tell you about those Structurer
What they are thinking about all day long
It's what kind of structure they can create
to make investors feel particularly attractive and valuable
after charging various fees and commissions.
This is actually a very interesting
behavioral finance.
Obviously,
Snowball products are products that can easily
lead to this bias.
This is because ordinary investors
usually tend to underestimate the risk of a stock market crash,
so you will see a large number of structured products,
such as Snowball, which will be used in the stock market.
You need to bear the risk of a crash yourself
because investors feel that the probability of it will be very small
and unlikely
but the model does not think so
Of course , it does not mean that what investors feel is wrong
and the model is right
Model is certainly not the truth.
It is also calculated based on the data of various
historical data of derivatives in the market.
This does not mean that it is right
Taking advantage of talking about Snowballs
about structured product
Lin managed to talk about some other things.
Those of you who have reach this point, let me give you a thumb up
and see you next time!
