PEREGRINE is launching a two-year $500 million note allowing investors upside exposure to the Hang Seng Index while protecting the principal. The product is aimed at medium-term investors who dislike the volatility of the Hong Kong stock market and the relatively low rate of return earned on money market investments. Under the issue, the note is split in two, offering investors different risk and reward profiles. For extremely risk-averse investors one version of the note provides 100 per cent principal protection and a 65 per cent participation in the Hang Seng Index. Less conservative investors are offered 90 per cent principal protection with 100 per cent exposure to the index. The guarantee behind the note was backed by Peregrine Investment Holdings. Chairman Philip Tose said: 'We feel comfortable with this as we add to our balance sheet.' He told a briefing that shareholders' funds had risen from US$440 million during the past year to $677 million this year. Peregrine derivatives director of sales Sunimal Goonetillake said the product was similar to Over-The-Counter options offered by banks to private clients. The guarantee was available because an estimated 80 per cent to 85 per cent was placed in money-market instruments, including the use of swaps to guarantee the principal on expiry. The upside exposure was expected to be gained through the purchase of call options on the index. As a listed vehicle, on the Hong Kong stock exchange, the note can be traded. Investors will be able to gain from buying or selling the note depending on whether it is quoted at a discount or a premium. Under the principal terms each note is issued at $1 with a minimum investment of $5,000 per investor. Each series will be up to $250 million each with maturity on May 29, 1997. Mr Goonetillake said: 'Investing in the stock market such as Hong Kong involves undertaking a high degree of risk for potentially high returns. 'The principal protected note allows investors to eliminate or reduce the market risk.' Although there had been some institutional interest the product is expected to attract retail investors. 'We believe the next two years will see unprecedented change in Hong Kong and the possibility of a re-rating of the Hang Seng Index to the valuation levels of our economic competitors as uncertainties surrounding Hong Kong gradually diminish,' Mr Goonetillake said. Peregrine said the notes were general, unsecured contractual obligations of the issuer and the guarantor and of no other person. 'If you purchase the notes, you are relying on the creditworthiness of the issuer and the guarantor and have no rights under the notes against any of the companies whose shares comprise the constituent stocks of the Hang Seng Index.' The product has been launched by Peregrine Strategic (Cayman). The sponsor is Peregrine Capital. In the listing details the net proceeds from the issue are shown at between $97 million and $497 million. The latest lodging for applications will be at noon on May 30. The announcement of the basis of allotment of notes is expected to be made on June 5, with certificates being posted a day later. If all goes to plan dealing will begin on June 9.