Tens of thousands of young retail investors in South Korea are facing huge losses, after they piled in to aggressive bets on movements in the price of oil. 

Many have bought exchange-traded notes linked to West Texas Intermediate, the US crude benchmark. Such instruments are traded like stocks and on maturity, pay a return based on the performance of oil futures — often amplified by leverage. 

But price falls of 50 per cent or more in the underlying asset can mean that the indicative value of these leveraged products drops to zero, causing them to be shut down with a total loss of investors’ principal.

Seoul’s Financial Supervisory Service issued its highest level of alert on oil-linked derivatives this week, after heavy flows into the products caused prices to diverge wildly from their indicative value, forcing the suspension of two of the biggest ETNs sold by Mirae Asset and Shinhan. The assets had been hit as WTI futures for delivery next month crashed on Monday, dropping from around $10 a barrel to close at minus $37.63.

One amateur investor, 32-year-old Jeong-ho Lee, said he stands to lose about $120,000 after investing in the Shinhan leveraged ETN, which dropped over 95 per cent before it was suspended by Korea Exchange on Wednesday.

“I had been losing sleep because of my losses and trading halts,” said the software engineer. “I mean, who would have imagined that a physical underlying asset could fall below zero?”

The collapse in oil this week caught out retail investors elsewhere. Bank of China, which had marketed a structured product called the “crude oil treasure,” said it was suspending its sale to new investors.

In Hong Kong on Friday, the regulator urged providers of exchange-traded products to “remain vigilant so that in extreme market conditions the funds can be managed in the best interests of investors.”

But in South Korea there has long been a thirst for racy products among people in their 30s and 40s struggling with low interest rates, stagnant salaries and unaffordable homes. Funds operating in the broader $90bn structured products market have set records for inflows this year. 

Oil-linked products have taken centre stage in recent weeks, attracting inflows of more than $2bn since the start of last month, according to exchange data — and prompting some analysts to draw parallels with a local craze for cryptocurrencies in 2017. 

Trading volumes for a handful of leveraged oil-linked products have hit records of around $1bn a day. One product designed by Samsung Asset Management — a leveraged inverse WTI note, which profits if the US benchmark drops — gained on eight consecutive trading days, in some cases by as much as the daily maximum of 60 per cent.

Analysts point to higher trading volumes around the 25th of each month, suggesting that retail investors are transferring big chunks of their salaries directly into these funds.

But some warned that many investors were probably unaware that their products would be forced to roll over expiring futures contracts into next-month contracts — at whatever price. 

In its statement, the FSS said the potential for investor losses from oil-linked structured products was very high, even if crude prices recover, because so many have been bought at a price above their indicative value. It said it was stepping up efforts to “normalise” the market. 

“Trading patterns of most retail investors in these products do not seem to show a fundamental understanding of how these products work,” said Hoon-gil Kim, senior analyst at Hana Financial Investment. “Risks that come from exposure to a very volatile underlying commodity and rollover costs need to be understood.”

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