Chinese investors burned by ill-timed bets on crude oil funds are now hoping for a huge rebound

Investors ploughed US$598 million into four open-ended oil funds last quarter, before WTI futures took a historic plunge

The funds trade at huge premium to their net asset values in hopes for rebound, prompting warning of ‘substantial losses’

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Oil storage tanks are seen in this aerial photograph taken on the outskirts of Ningbo, Zhejiang province, China on April 22. Oil glut has left the industry short of storage capacity, abetting the slump in crude prices. Photo: Bloomberg

Published: 10:46am, 12 May 2020Updated: 10:44pm, 12 May 2020

Chinese investors loaded up on four listed investment funds that bet on an upswing in global crude prices just before the commodity took a historic plunge, leaving the market with potential losses in store.

They ploughed 4.23 billion yuan (US$597.8 million) last quarter into the open-ended funds managed by E Fund Management, China Southern Asset Management, Harvest Fund Management and Guotai Asset Management. The funds invest in offshore exchange-traded funds (ETFs) that primarily track the performance of West Texas intermediate (WTI) futures.

The inflow was the biggest in at least five quarters, and reversed three straight quarters of net withdrawals through last year. Overall, net withdrawal in 2019 was US$27.8 million.

The rush into crude oil funds, however, coincided with a 69 per cent slump in WTI futures for the May contract, before it crashed further to negative US$40.32 a barrel on April 20. Investors are still hoping to ride out the storm as the funds traded above their net asset values, prompting a warning from one of the managers.

“If investors blindly invest into fund units trading at a high premium, they may face substantial losses,” according to a May 8 notice issued by E Fund Asset Management, whose Shenzhen-listed Crude Oil Fund has lost about 71 per cent of its underlying value this year through April 29.

The ill-timed bets highlight some pitfalls lurking in onshore investment products tied to the vagaries of the global commodity market when chasing after higher returns.

One recent example is the speculative trading platforms passed up as wealth management products that blew up last month. Investors are said to be suing Bank of China to repudiate the billion-dollar losses in the “Crude Oil Treasure” platform that was caught in the oil market carnage.

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