I just learned about this type of (ETF?) fund traded on Chinese stock market.

The fund's total asset, while being invested in a certain set of equities, is divided into two sub-funds, Fund A and Fund B. Both sub-funds (closed-end in my understanding) are separately traded on the exchange as ETF's. However, Fund A is a fixed income fund to its investors. Fund A's downside risk and dividends are assumed by Fund B. While Fund B takes Fund A's responsibilities, it also inherits higher returns (and also higher risks) associated with the underlying equities. The operator of the fund adjusts asset ratio between Fund A and Fund B whenever Fund A's market price drops by 10% (and perhaps rises by 10% too). At the adjustment, both sub-funds' market prices get revalued, and Fund B's investors may get certain number of shares of Funds A which can then be sold to the market at anytime.

Fund B sounds somewhat like the 2x or 3x ETF's in the US, but it does not re-adjust its asset everyday while the 2x and 3x ETF's do.

What do you see the pros and cons of this type of funds? Does it sound very lucrative for the fund operators? What strategies would allow investors to make money with it?


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