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【硬核】神秘的金融产品如何导致富豪们接连爆仓

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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?

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!

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【硬核】神秘的金融产品如何导致富豪们接连爆仓