1. Risks associated with the MRF arrangement

l   Quota restrictions: The Mainland-Hong Kong Mutual Recognition of Funds (MRF) scheme is subject to an overall quota restriction. Subscription of units in the Fund may be suspended at any time if such quota is used up.

l   Failure to meet eligibility requirements: If the Fund ceases to meet any of the eligibility requirements under the MRF, it may not be allowed to accept new subscriptions. In the worst scenario, the SFC may even withdraw its authorization for the Fund to be publicly offered in Hong Kong for breach of eligibility requirements. There is no assurance that the Fund can satisfy these requirements on a continuous basis.

l   Mainland China tax risk: Currently, certain tax concessions and exemptions are available to the Fund and/or its corporate and individual investors in Hong Kong under the MRF regime. There is no assurance that such concessions and exemptions or Mainland China tax laws and regulations will not change. Any change to the existing concessions and exemptions as well as the relevant laws and regulations may adversely affect the Fund and/or its investors and they may suffer substantial losses as a result.

l   Different market practices: Market practices in the Mainland China and Hong Kong may be different. In addition, operational arrangements of the Fund and other public funds offered in Hong Kong may be different in certain ways. For example, subscriptions or redemption of units of the Fund may only be processed on a day when both Mainland China and Hong Kong markets are open, or it may have different cut-off times or dealing day arrangements versus other SFC-authorised funds. Investors should ensure that they understand these differences and their implications.

2. Investment risk

l   The Fund is an investment fund. There is no guarantee of the repayment of principal or payment of dividend or distribution. Further, there is no guarantee that the Fund will be able to achieve its investment objectives and there is no assurance that the stated strategies can be successfully implemented.

3. Concentration risk / Mainland China market risk

l   The Fund invests primarily in securities related to the Mainland China market and may be subject to additional concentration risk. Investing in the Mainland China market may give rise to different risks including political, policy, tax, economic, foreign exchange, legal, regulatory and liquidity risks.

4. RMB currency and conversion risk

l   RMB is currently not freely convertible and is subject to exchange controls and restrictions.

l   Non-RMB based investors are exposed to foreign exchange risk and there is no guarantee that the value of RMB against the investors’ base currencies (for example HKD) will not depreciate. Any depreciation of RMB could adversely affect the value of investor’s investment in the Fund.

l   Investors may not receive RMB upon redemption of investments and/or dividend payment or such payment may be delayed due to the exchange controls and restrictions applicable to RMB.

 5. Mainland China equity risks

l   Market risk: The Fund’s investment in equity securities is subject to general market risks, whose value may fluctuate due to various factors, such as changes in investment sentiment, political and economic conditions and issuer-specific factors.

l   Volatility risk: High market volatility and potential settlement difficulties in the Mainland China equity markets may also result in significant fluctuations in the prices of the securities traded on such markets and thereby may adversely affect the value of the Fund.

l   Policy risk: Securities exchanges in Mainland China typically have the right to suspend or limit trading in any security traded on the relevant exchange. The government or the regulators may also implement policies that may affect the financial markets. All these may have a negative impact on the Fund.

l   High valuation risk: The stocks listed on the Mainland China stock exchanges may have a higher price-earnings ratio; and such high valuation may not be sustainable.

l   Liquidity risk: Securities markets in Mainland China may be less liquid than other developed markets. The Fund may suffer substantial losses if it is not able to dispose of investments at a time it desires.

l   Risk associated with small-capitalisation / mid-capitalisation companies: The Fund may invest more than 30% of its Net Asset Value in small-capitalisation and mid-capitalisation Mainland China enterprise stocks. The stocks of small-capitalisation / mid-capitalisation companies may have lower liquidity and their prices are more volatile to adverse economic developments than those of larger capitalisation companies in general.

6. Mainland China debt securities risks

l   Volatility and liquidity risks: The Mainland China debt securities markets may be subject to higher volatility and lower liquidity compared to more developed markets. The prices of securities traded in such markets may be subject to fluctuations.

l   Counterparty risk: The Fund is exposed to the credit/default risk of issuers of the debt securities that the Fund may invest in.

l   Interest rate risk: Investment in the Fund is subject to interest rate risk. In general, the prices of debt securities rise when interest rates fall, whilst their prices fall when interest rates rise.

l   Downgrading risk: The credit rating of a debt instrument or its issuer may subsequently be downgraded.  In the event of such downgrading, the value of the Fund may be adversely affected.  The Fund Manager may or may not be able to dispose of the debt instruments that are being downgraded.

l   Credit rating agency risk: The credit appraisal system in Mainland China and the rating methodologies employed in Mainland China may be different from those employed in other markets.  Credit ratings given by Mainland China rating agencies may therefore not be directly comparable with those given by other international rating agencies.

l   Risk associated with urban investment bonds: The Fund may invest in urban investment bonds. Urban investment bonds are issued by local government financing vehicles (“LGFVs”), such bonds are typically not guaranteed by local governments or the central government of Mainland China. In the event that the LGFVs default on payment of principal or interest of the urban investment bonds, the Fund could suffer substantial loss and the Net Asset Value of the Fund could be adversely affected.

l   Risk associated with asset-backed securities: The Fund may invest in asset-backed securities (including asset-backed commercial papers) which may be highly illiquid and prone to substantial price volatility. These instruments may be subject to greater credit, liquidity and interest rate risk compared to other debt securities. They are often exposed to extension and prepayment risks and risks that the payment obligations relating to the underlying assets are not met, which may adversely impact the returns of the securities.

l   Risk associated with debt securities which are rated BB+ or below by a Mainland China credit rating agency or unrated: The Fund may invest in debt securities rated BB+ or below by a Mainland China credit rating agency or unrated. Such securities are generally subject to lower liquidity, higher volatility and greater risk of loss of principal and interest than high-rated debt securities.

7. Risks associated with the SME board and/or ChiNext and/or STAR Board

l   Higher fluctuation on stock prices and liquidity risk: Listed companies on the SME board and/or ChiNext and/or STAR Board are usually of emerging nature with smaller operating scale. In particular, listed companies on STAR Board are subject to wider price fluctuation limits, and due to higher entry thresholds for investors may have limited liquidity, compared to other boards. Hence, they are subject to higher fluctuation in stock prices and liquidity risk and have higher risks and turnover ratios than companies listed on the main board.

l   Over-valuation risk: Stocks listed on the SME board and/or ChiNext and/or STAR Board may be overvalued and such exceptionally high valuation may not be sustainable. Stock price may be more susceptible to manipulation due to fewer circulating shares.

l   Differences in regulations: The rules and regulations regarding companies listed on ChiNext and the STAR Board are less stringent in terms of profitability and share capital than those in the main board and SME board.

l   Delisting risk: It may be more common and faster for companies listed on the SME board and/or ChiNext and/or the STAR Board to delist. In particular, STAR Board has stricter criteria for delisting compared to other boards. This may have an adverse impact on the Fund if the companies that it invests in are delisted.

l   Concentration risk: STAR Board is a newly established board and may have a limited number of listed companies during the initial stage. Investments in STAR Board may be concentrated in a small number of stocks and subject the Fund to higher concentration risk.

l   Investments in the SME board and/or ChiNext and/or STAR Board may result in significant losses for the Fund and its investors.  

8. Risks associated with depositary receipts

l   Risk associated with the issuer of the underlying overseas securities: As the issuers of the underlying overseas securities corresponding to depositary receipts (“overseas issuers”) are governed by overseas laws and regulations of its place of incorporating or listing, there may be potential risks caused by differences in the legal status and rights exercisable by holders of depositary receipts and shareholders of the overseas issuers; There may be risks associated with special arrangements made for depositary receipt holders in terms of dividend distributions, which may cause depositary receipt holders to receive their stock dividends at a time different than the holders of the underlying overseas securities; There may be risks associated with special arrangements relating to the exercising of voting rights; There may be risk of dilution of depositary receipt holders’ interests in certain circumstances, such as the overseas issuers offering rights issue to the holders of the underlying securities but the depositary receipt holders may not be able to participate in such rights issues; There may be risks relating to differences in supervision of ongoing information disclosure requirements applicable in the different listing markets, and other risks that may be caused by differences in domestic and overseas legal systems and regulatory environments.

l   Risk associated with depositary receipts: Upon purchasing depositary receipts, investors holding depositary receipts will automatically be deemed as having executed and become a party to the depositary agreement, there may be risks associated with the terms of the depositary agreement which is binding to them; There may be risks associated with the delisting of the depositary receipt such as inability of the depositary to sell the underlying securities according to the depositary agreement.

l   Risk associated with the depositary receipt trading mechanism: As the depositary receipts and the underlying securities are listed in multiple markets, they may have different trading hours due to difference of time zone and trading rules. There may be risks that the trading price of depositary receipts may be swayed by the opening price and closing price of the underlying securities and other events in the overseas market. Compared to investment in companies that are listed only in Mainland’s domestic securities market, investments in depositary receipts may be subject to higher price volatility resulting in greater financial losses.

9. Taxation risk

l   Investors should note specific uncertainty in tax position and tax risks relating to potential tax liabilities on income and gains that arise from investing in, holding or disposing of Units in the Fund. Changes in tax regulations and/or tax provisioning policy of the Fund will impact investors remaining in the Fund. Investors who have sold or redeemed their interests prior to such change will not be impacted. Investors may be advantaged or disadvantaged depending upon whether and how the gains arising from the disposal of Units and distributions from the Fund will ultimately be taxed and when the investors invest in the Fund. There are certain risks relating to Mainland China tax regime and FATCA, as further described in the section headed “Taxation” in the Hong Kong Covering Document.

10. Distribution out of capital risk

l   Investors should note that the payment of distributions out of capital represents a return or a withdrawal of part of the amount they originally invested or capital gain attributable to that. Any distributions involving payment of dividends out of capital of the Class H Units will result in an immediate decrease in the Net Asset Value per unit of Class H Units.

11. Risk relating to repurchase / reverse repurchase transactions

l   The Fund Manager may enter into repurchase / reverse repurchase transactions for the account of the Fund.

l   The collateral pledged under the reverse repurchase transactions in the interbank market may not be marked-to-market.

l   For repurchase transaction, the Fund may suffer substantial loss as there may be delay and difficulties in recovering the collateral pledged with the counterparty or the cash originally received may be less than the collateral pledged with the counterparty due to inadequate valuation of the collateral and market movements upon default of the counterparty.

l   For reverse repurchase transactions, the Fund may suffer substantial loss as there may be delay and difficulties in recovering the cash placed out or realizing the collateral, or proceeds from the sale of the collateral may be less than the cash placed with the counterparty due to inadequate valuation of the collateral and market movements upon default of the counterparty.