Hundreds of local investors are facing potentially huge losses after supposedly low-risk investments offered by two prestigious UK financial institutions appear to have soured.
At risk are millions of dollars pumped into the with-profits funds policies offered by highly rated insurance providers Scottish Mutual International (SMI) and Clerical Medical International (CMI).
The annual performance bonuses paid out by the funds have tumbled in recent years, ending a long tradition of handsome returns. SMI has paid no bonus for two years on some funds, while CMI slashed its bonuses to between 1 and 1.5 per cent, well below the 7 to 8 per cent represented in marketing literature.
The annual payouts are well below current bank lending rates, leaving investors who made their initial investments with borrowed money in a loss-making position. Those who borrowed in foreign currencies such as euros are in a particularly bad position. Estimates suggest between 50 and 80 per cent of the investments were leveraged.
Investors who try to exit the funds face hefty penalties that could end up wiping out their entire initial investments and in some cases even leave them owing money.
Investment advisers say those who hold the funds until maturity should fare better, but it is unlikely the funds will ever return anything near the double-digit returns investors said they were led to believe the funds would deliver.
The funds were especially popular among Hong Kong's professional class, including bankers and lawyers. These investors are believed to be outraged at what they say was a misrepresentation of the expected risks and returns.