Page 117 - Undergraduate Research Opportunities Program Proceedings 2017-18

School of Business and Management
Department of Finance

This paper discusses the return and risk characteristics of A tranche, B tranche and the parent fund of China’s structured
funds and their correlation with the benchmark. The analysis is based on empirical data of 15 structured funds from
their inception date to May 2018. Structured funds were first developed in China in 2007. The A tranche has fixed-
income characteristics while the B tranche is like investing into equity market with leverage. Other than that, some
special design of structured funds, such as redistribution schemes and redemption methods, increased complexity of
this financial instrument. Therefore, analysis of their previous performance can shed some light on the understanding of
structure funds and facilitate further research.

Supervisor: LI Kai / FINA
Student: LIU Xinyi / ECOF Course: UROP1100, Summer

The objectives of this project are to have a deep understanding of China’s structured mutual funds and to prove the
inner relationship between the fund and the tracked index. We first spent nearly one month to study what a structured
mutual fund contains and how it works. After knowing its special mechanism of liquidating, I began to focus on the
relationship between sub-fund A’s price and the index when the fund price is close to liquidation. I did linear regression
on these two variables to prove that they are negatively correlated. The result shows that the change of fund A’s price
and the change of index in different time are negatively correlated. It is proved that fund A has predictability to the
index in short term but how big and how long the effect is stays unknown.

Supervisor: LI Kai / FINA
Student: TSANG Wai Kit / FINA Course: UROP1100, Summer

This research paper is an empirical study and theoretical verification of the value computation method introduced by
Haidong Zhang in his article “Research to the Structured Fund Embedded Option Pricing”. The research computation
using Zhang’s pricing method to compute the theoretical upper limit and lower limit for A tranche value, then uses ADO
as a replication for the possibility of downward conversion to compute the theoretical value for A tranche and
simultaneously compute the theoretical value for B tranche. The result shows a great coherence in its trend with minor
deviation between theoretical price and actual price, which are possibly caused by the assumption made for
simplification during computation, such as constant variance.

Supervisor: LI Kai / FINA
Student: ZHANG Wenhao / ECOF Course: UROP1100, Summer
ZOU Haoxiang / RMBI UROP1100, Summer

China’s structured mutual funds are special and complex financial vehicles in the world. Most of them are divided into
two tranches, with a low-risk fixed income tranche (A tranche) and a leveraged equity tracking tranche (B tranche). The
design of the funds fully reflects the two basic mentalities of investors in the financial markets, which are risk-averse and
risk-loving. The purpose of this research is to understand the principles and the potential opportunities of China’s
structured mutual funds, by conducting back-testing on the wheel trading strategy in a long time period. The core
analysis included the building of the proper fund’s database and the design of the whole back-testing procedures. We
also conducted basic analysis to evaluate the performance of the structured funds in the database. These findings can be
applied to the real markets and provides some guidance to the individual investors.

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