Still trading at a 37% premium after four consecutive limit-downs! Silver LOF plummets, questioning product design logic. Can it withstand extreme market conditions again?

Guotou UBS Silver LOF Net Asset Value Plunges Over 30% in a Single Day, Deeply Questioning the Underlying Design Logic of This Product.

Faced with heavy losses, some investors have proposed a straightforward “self-rescue” plan: have the fund company temporarily break from convention and use derivatives for hedging to “patch” the product and prevent further decline. But can this seemingly ideal wish be realized in practice? Are there similar products in overseas markets that can serve as references?

A survey by the Daily Economic News found that industry insiders generally answer “difficult,” mainly due to three barriers: product positioning, risk matching, and practical operation.

Notably, since February, Guotou White Silver LOF has experienced four consecutive limit-downs, trading at 3.443 yuan, with the latest premium rate at 37.12%.

The Ideal of a “Hedging Patch” and the Three Practical Barriers

A widely discussed suggestion on platforms like Xiaohongshu is: “In such extreme situations, can Guotou UBS Funds apply for a temporary breach of position or derivative investment limits and activate hedging tools?”

The prospectus of the Guotou UBS Silver Fund states that the fund holds silver futures contracts valued at no less than 90% and no more than 110% of the fund’s net assets. Additionally, the investment ratio of warrants (including options) is limited to no more than 3% of the fund’s net assets.

This demand is straightforward and simple: since the product suffers heavy losses when it declines, can technical means be used to “repair” it and make it more resistant to drops? In response, a public fund research professional told the Daily Economic News that, based on industry realities, there are multiple layers of challenges.

First Layer: Changing the Goal — What Exactly Are You Investing In?

When addressing investors’ concerns, the fund research professional first returns to the product’s essence and raises a core question: when investing in silver products, what do you actually want to invest in?

He explained the product’s original design: “Most investors participate in silver products mainly to track silver price movements. Guotou UBS Silver LOF chooses to invest in futures because the main contract of the Shanghai Futures Exchange silver futures is relatively active, supporting a certain scale of capital inflow and outflow. In contrast, the physical silver market has limited trading activity and market depth, making it difficult to accommodate large-scale capital movements.”

He further explained that the strict contractual provisions of the product clarify its purely tool-like nature—aiming for an average tracking deviation of no more than 0.5% daily and an annualized tracking error of no more than 7%. Attempting to achieve “rising with the market, not falling with it” through hedging would transform the product from a passive tracking tool into an actively managed product with subjective elements, fundamentally deviating from its original purpose.

Second Layer: Investor Suitability Principles — Can Current Holders Bear the Risks of Hedging Strategies?

Meanwhile, the researcher raised a second question: if a hedging mechanism is added, can investors withstand the risks brought by the hedging strategy itself?

He elaborated: “Risk hedging is an investment goal, but it doesn’t mean the hedging strategy won’t introduce new risks, and in some cases, may even amplify losses if the hedge fails. Currently, the fund with over 10 billion yuan in assets has risk tolerance levels roughly matching its high-risk rating (R4). But once more complex strategies are introduced, the direct consequence is a mismatch with the risk tolerance of existing investors.”

He believes that regardless of whether practical implementation is feasible, the investment strategy of public funds should not be arbitrarily adjusted. Introducing complex strategies would inevitably lead to risk mismatches with existing investors’ risk capacity. No matter the subjective initial intent, this fundamentally constitutes risk misalignment.

Third Layer: Scarcity of Tools and Doubts About Practical Feasibility — Similar Strategies Are Hard to Find in Overseas Public Funds

Finally, the researcher returned to practical considerations, analyzing the feasibility.

He argued that focusing solely on silver futures and attempting to perfectly hedge via derivatives to control volatility, even to the point of expecting “rising with the market, not falling with it,” is unrealistic. Even in overseas markets, mature products capable of achieving this are hard to find.

The reporter noted that among existing overseas silver-related products, the closest to Guotou UBS Silver LOF is the PowerShares DB Silver Fund (DBS) in the US, which mainly invests in silver futures. Typically, products investing in silver futures are affected by rollover costs, contango/backwardation, and other factors, especially during extreme market volatility, where these negative effects can be magnified. DBS completed its last trading day in March 2023 and subsequently liquidated. The largest silver product globally is iShares Silver Trust (SLV), which invests in physical silver. It experienced a sharp decline of 28.54% on January 30, 2026.

Additionally, the researcher pointed out that all product designs have inherent limitations. When initially designed, no one could foresee such extreme market conditions over the next decade. The core risk of tracking international prices via domestic futures contracts lies in the unpredictability of the market itself, not merely in operational errors.

International References: Physical Silver ETFs Are More Valuable

Guotou UBS Silver Fund is a rare product, almost the only domestic public offering directly investing in silver futures LOF. So, what other silver investment products are available internationally?

An anonymous fund professional pointed out that the main mainstream silver investment products internationally include physical silver ETFs, silver futures, and silver mining ETFs. Additionally, there are bank-issued paper silver, physical silver bars/coins, etc. Silver futures focus on short-term speculation and hedging, mining ETFs are more volatile and suitable for risk-tolerant funds, while paper silver and physical silver are more oriented toward retail small-scale operations or traditional allocations.

Several fund research professionals interviewed believe that for China’s public fund industry, products investing in physical silver are most instructive.

In their view, physical silver ETFs, with their “physical backing + share-based” design, can address the high entry barriers and storage costs of domestic silver investment. Standardized shares fit the inclusive positioning of public funds, and the physical custody mechanism ensures fair net asset value. Meanwhile, the “physical redemption + secondary market arbitrage” mechanism can suppress premiums and discounts, improve tracking accuracy, and low-cost operation strategies meet domestic investor needs. This model not only fills the gap of domestic silver spot public products but also aligns with regulatory requirements and investor risk preferences, helping to improve the commodity product line with strong practical feasibility.

Can Guotou UBS Silver Fund Transition to a QDII-FOF Model?

2025 is expected to be a year of development for commodity funds. These funds roughly fall into four categories, each with different investment targets and risk management logic.

The largest and most mainstream category is represented by various gold ETFs, such as Huaxia Gold ETF and Bosera Gold ETF. Their assets are almost entirely invested in gold spot contracts traded on the Shanghai Gold Exchange. These funds have relatively simple risk profiles, mainly driven by gold price fluctuations, without leverage or complex rollover issues.

Next are funds directly investing in domestic commodity futures contracts, covering silver, non-ferrous metals, soybean meal, energy, and chemicals. These tools provide futures price exposure, with more complex risk control mechanisms. As previously mentioned, these funds typically specify a maximum investment ratio in the underlying futures (e.g., 90%), and retain some cash to cope with volatility. They also limit positions in single contracts or maturities to avoid excessive concentration risk.

For example, the Dacheng Non-Ferrous Metal Futures ETF’s quarterly report for 2025 shows that its portfolio strictly follows the fund contract, with the total value of futures contracts (net of buy-sell differences) holding at least 90% and no more than 110% of the net assets. The portfolio tracks the prices of copper, aluminum, lead, zinc, nickel, and tin futures on the Shanghai Futures Exchange.

The Daily Economic News noted that such products mostly exist as ETFs with diversified investment scopes.

Besides clear restrictions on investment scope and position management, these funds also employ risk and tracking error control mechanisms through cash management and other methods.

The third category involves cross-border commodity funds operated via the QDII channel. Notably, although they are labeled with terms like LOF, the underlying logic of mainstream commodity LOFs differs fundamentally from Guotou UBS Silver LOF.

A research professional from a fund company explained that most domestic commodity LOFs, such as Harvest Crude Oil and E Fund Gold Theme, are in the QDII-FOF mode. Their operation involves domestic funds investing in overseas funds, which then invest in underlying assets. The core responsibility of fund managers is to select and manage these overseas instruments, while complex market rules like handling futures limit moves or contract rollovers are managed by the overseas fund managers. In short, mainstream QDII commodity LOFs introduce overseas instruments as a buffer layer, achieving partial risk isolation.

So, is it possible for Guotou UBS Silver LOF to convert into a QDII-FOF?

A senior executive from a large fund company told the Daily Economic News that even if the silver LOF is converted into a QDII mode, a fundamental issue remains: what should the underlying be—futures contracts or physical silver? If it still invests in futures, there is no fundamental improvement over the current model.

He further clarified the core constraint: domestically, it is impossible to launch a silver ETF directly, mainly due to tax issues—physical silver investments require taxes, whereas gold enjoys tax exemption policies.

The last category involves resource-based equity funds, such as gold stock ETFs and coal ETFs. They invest in stocks of related listed companies, essentially representing equity investments. Their performance is a dual reflection of commodity prices and stock market logic. Consequently, their risk control mechanisms are more similar to stock funds, focusing on industry diversification, stock selection, and systemic risk prevention, with commodity price fluctuations being just one of many factors affecting net value.

Limited Measures Facing Infinite Market Movements

The valuation incident of Guotou UBS Silver LOF has attracted significant attention within the public fund industry. Through multiple inquiries, many fund research professionals believe that the product’s design has inherent historical limitations, based on the understanding at the time, and could not foresee such extreme market conditions in the future.

When the greatest risk materializes, fund companies are essentially using limited measures to respond to an infinite market. As a result, the improvements and adjustments made afterward are often only partial and cannot fully meet investors’ expectations of avoiding losses altogether.

Currently, the industry’s feasible improvements mostly involve process optimization, such as moving risk disclosures earlier—e.g., from Monday to the weekend. Some suggestions that seem to directly protect investors, like suspending subscriptions and redemptions during extreme volatility, are generally considered unlikely under existing regulations.

It is foreseeable that this incident, as an extreme precedent, will prompt the industry to thoroughly review and reflect on this product category. Future product design concepts and risk management standards may be adjusted accordingly following this stress test.

(Article source: Daily Economic News)