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?

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

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

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

It is worth noting that since February, China Investment White Silver LOF has experienced four consecutive limit-downs, closing at 3.443 yuan, with the latest premium rate at 37.12%.

The Hope for a “Hedging Patch” and the Three Practical Barriers

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

The prospectus of China Investment 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 asset value. At the same time, the investment ratio of warrants (including options) is limited to no more than 3% of the fund’s net asset value.

This request is straightforward and simple: since the product suffers heavy losses when prices fall, can we “patch” it with technical means to make it more resistant to declines? In response, a public fund research and investment professional told Daily Economic News that, based on industry realities, this is a layered analysis.

First Layer: Changing the Goal—What Exactly Are You Trying to Invest In?

When answering investors’ questions, the fund research professional first returns to the essence of the product and raises a core question: when investing in silver products, what do you primarily want to achieve?

He explained the original design intent: “Most investors participating in silver products hope to track silver price movements. China Investment UBS Silver LOF chooses to invest in futures because the main contract of Shanghai Futures Exchange silver futures is relatively active, supporting a certain scale of capital inflow and outflow; whereas 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 when prices rise, not falling when prices fall’ through hedging would transform the product from a passive tracking tool into a product with active management features, fundamentally deviating from its original purpose.

Second Layer: Investor Suitability Principles—Can Current Fund 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 explained further: “Risk hedging is an investment goal, but it does not mean the hedging strategy won’t introduce new risks, and 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 in R4; but once more complex strategies are introduced, the direct consequence is a mismatch with the risk tolerance of existing investors.”

In his view, regardless of whether practical implementation is feasible, the investment strategy of public funds should not be arbitrarily adjusted. Introducing complex strategies will inevitably lead to risk-product mismatch with existing investors. No matter the subjective initial intent, this fundamentally constitutes risk misalignment.

Third Layer: Scarcity of Tools and Doubts About Practical Feasibility—Are Similar Strategies Implementable in Overseas Public Funds?

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

He believes that solely investing in silver as a single commodity and attempting to perfectly hedge via derivatives to control volatility, even to the point of expecting “rising when prices rise, not falling when prices fall,” is too detached from reality. Even in overseas markets, it is difficult to find mature products capable of achieving this goal.

The reporter noted that among existing overseas silver-related products, the closest to China Investment UBS Silver LOF is the PowerShares DB Silver Fund (DBS) in the US, which mainly invests in silver futures. Generally, products investing in silver futures are affected by rollover costs, contango and backwardation, especially during extreme market volatility, which can further magnify negative impacts. 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 their historical limitations. When initially designed, no one could foresee such extreme market conditions in 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

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

An anonymous fund professional pointed out that the main mainstream silver investment products in the international market 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 tend to be more volatile and suitable for risk-tolerant funds; paper silver and physical silver are more oriented toward retail small-scale operations or traditional allocation needs.

Several fund research professionals interviewed agreed 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 thresholds and storage costs associated with 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 China Investment UBS Silver Fund Transition to a QDII-FOF Model?

2025 is expected to be a year of development for commodity funds. These funds can be roughly divided 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, Bosera Gold ETF, etc. Their assets are almost entirely invested in gold spot contracts traded on the Shanghai Gold Exchange. The risk of these funds is relatively simple—mainly the fluctuation of gold prices, without leverage or complex factors like futures rollovers.

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 proportion (e.g., 90%) of their investments in futures contracts, with some cash reserves to cope with volatility. They also limit positions in single contracts or maturities to avoid excessive concentration risk.

For example, the Dacheng Non-Ferrous Metals Futures ETF’s quarterly report for 2025 shows that its portfolio strictly follows the contractual limits, with the total value of index component futures contracts (including buy and sell netting) not less than 90% and not more than 110% of the fund’s net asset value. The portfolio tracks the prices of copper, aluminum, lead, zinc, nickel, and tin futures traded on the Shanghai Futures Exchange.

Besides clear restrictions on investment scope and position management, these funds also manage risks and tracking errors through cash management and other mechanisms.

The third category involves cross-border commodity funds operated via QDII channels. It is noteworthy that although they all carry labels like LOF, the underlying logic of mainstream commodity LOF funds differs fundamentally from China Investment UBS Silver LOF.

A research professional from a large fund company pointed out that most domestic commodity LOFs familiar to investors, such as Harvest Crude Oil, E Fund Gold Theme, etc., are in fact QDII-FOF models. Their operation involves 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 futures limit handling and contract rollovers are managed by the overseas fund managers. In short, mainstream QDII commodity LOFs introduce overseas tools as a buffer layer, achieving partial risk isolation.

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

A professional from a major fund company told Daily Economic News that even if the silver LOF is converted into a QDII model, a fundamental issue must be addressed: what should the underlying investment be—futures contracts or physical silver? If it remains in futures, there is no essential improvement over the current model.

He further clarified the core constraint: domestically, it is impossible to directly launch a silver ETF because of tax issues—physical silver investments are taxed, whereas gold enjoys tax exemption policies.

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

Limited Measures in Response to Infinite Market Conditions

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

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

Currently, most industry discussions on improvements focus on 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 current 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 as a result of this stress test.

Source: Daily Economic News

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