1.General investment risk
The Sub-Fund’s investment portfolio may fall in value due to any of the key risk factors below and therefore your investment in the Sub-Fund may suffer losses. There is no guarantee of the repayment of principal. There is no assurance that the Sub-Fund will achieve its investment objective.
2.Ether risks
The Sub-Fund is directly exposed to the risks of ether through investment in ether, and the following risks which adversely affect the price of ether may also affect the value of the Sub-Fund.
New innovation risk: Ether is a relatively new innovation and the market for ether is subject to rapid price swings, changes and uncertainty. It is not backed by any authorities, government or corporations. Continued and further development of the Ethereum Network and the acceptance and use of ether are subject to a variety of factors that are difficult to predict or evaluate. Any cessation or reversal of such development of the Ethereum Network or the acceptance of ether may adversely affect the price of ether and thus the Sub-Fund’s investment.
Unforeseeable risks: Given the rapidly evolving nature of ether, including advancements in the underlying technology, market disruptions and resulting governmental interventions that are unforeseeable, an investor may be exposed to additional risks which cannot currently be predicted.
Speculative risk: Ether is highly speculative as it has limited track record and lack of intrinsic value. Its value is primarily driven by supply and demand dynamics within the ether market and does not generate cash flows.
Extreme price volatility risk: Investing in ether and related products is highly volatile compared to investments in traditional securities, and their price movements are difficult to predict. The prices of ether have historically been extremely volatile. For example, the price of ether dropped 76% during the period from 10 November 2021 to 9 November 2022. Also, the value of ether could decline significantly in a short period of time and without warning, including to zero. For example, in 2020, the biggest single-day drop of the price of ether was 44%.1 The value of the Sub-Fund’s investments in ether could decline significantly and without warning, including to zero.
Risk relating to the limited history of ether: Ether and the Ethereum Network have a limited history, therefore, it is unclear how all elements of ether will unfold over time, specifically with regard to governance between miners, developers and users, as well as the long-term security model as the mining reward of ether decreases over time. Insufficient software development or any other unforeseen challenges that the ether community is not able to resolve could have an adverse impact on ether price and thus the Sub-Fund’s investment.
Cybersecurity, fraud, market manipulation and security failure risk: Ether may be subject to the risk of fraud, theft, manipulation or security failures, operational or other problems that impact ether trading venues. In particular, the Ethereum Network and entities that hold ether in custody or facilitate the transfers or trading of ether are vulnerable to various cyber attacks. Malicious actors may also exploit flaws in the code or structure in the Ethereum Network that will allow them to, among other things, steal ether held by others, control the blockchain, steal personally identifying information, or issue significant amounts of ether in contravention of the protocols.
The occurrence of any of the above may have negative impact on the price of ether and thus the Sub-Fund’s investment.
Concentration of ownership risk: A significant portion of ether is held by a small number of holders who may have the ability to manipulate the price of ether. As a result, large sales by such holders could have an adverse effect of the market price of ether.
Changes in acceptance of ether: The value of ether is subject to risks related to its usage and there is no assurance that ether usage will continue to grow over the long-term to support its value. Reduction or slowdown in the acceptance and/or prevalence of ether may result in lack of liquidity, increased volatility or a significant reduction in the price of ether and thus the Sub-Fund’s investment.
Regulatory risk: The regulation on ether, digital assets and related products and services continues to evolve and increase. To the extent that future regulatory actions or policies limit or restrict ether usage, ether trading or the ability to convert ether to fiat currencies, the demand for and value of ether may be reduced significantly. Changes to existing regulation (e.g., regarding dealing in virtual asset-related products) may also impact the ability of the Sub-Fund to achieve its investment objective or operate as planned.
Fork risk: As the Ethereum Network is an open-source project, the developers may suggest changes to the ethereum software from time to time. If the updated ethereum software is not compatible with the original ethereum software and a sufficient number (but not necessarily a majority) of users and miners elect not to migrate to the updated ethereum software, this would result in a “hard fork” of the Ethereum Network, with one prong running the earlier version of the ethereum software and the other running the updated ethereum software, resulting in the existence of two versions of Ethereum Network running in parallel and a split of the blockchain underlying the Ethereum Network. The occurrence of such “fork” may result in an adverse impact on the price and liquidity of ether and thus the Sub-Fund’s investment. In case of a “hard fork”, each of the Manager and the Sub-Manager will, acting in the best interest of investors, use its sole discretion to determine which network should be considered the appropriate network for the Sub-Fund and keep investors informed. There is no guarantee that the Manager and/or the Sub-Manager will choose the digital asset that is ultimately the most valuable fork, and their decision may adversely affect the value of the Sub-Fund as a result.
Contagion risk: The collapse of any major players in the crypto ecosystem (for example, wallets and trading platforms) may have contagious adverse effects on the values of virtual assets including ether and the value of the Sub-Fund’s investments. Over the past several years, a number of major players such as less regulated virtual assets trading venues have experienced, or may in the future, collapse, stop operating or temporarily or permanently shut down due to issues such as fraud, failure, security breaches, cybersecurity issues or manipulation. This may adversely affect the value of ether and thus the value of the Sub-Fund.
Control and potential manipulation of Ethereum Network risk: Ethereum Network is vulnerable to malicious attack and malicious actor would be able to gain full control of the network and the ability to manipulate the blockchain. If an entity gains control of over 50% of the computing power (requiring 51% ownership of the ether that is staked with validators) the entity could use its majority share to double spend ether. Eventually, this would significantly erode trust in the Ethereum Network as a store of value and means of exchange which may significantly decrease the value of the ether and in turn the NAV of the Shares. The two largest miners or pools of Ethereum control in the aggregate more than 50% of the Ethereum Network.
Illicit use of ether: Ether can be used to purchase illegal goods, fund illicit activities or launder money. Negative developments of ether may affect the general outlook on the industry as a whole, trigger governmental intervention/restrictions/regulations, and may have adverse effect on the Sub-Fund’s investments.
3.Risks associated with staking
There is no guarantee that staking will yield rewards, and past rewards are not indicative of future returns. If the staking services are ceased or terminated, the Sub-Fund may not be able to stake the Sub-Fund's assets for a period of time or at all.
Staking service providers: . The Sub-Fund is exposed to the risk of loss of staked ether if the staking service providers fail to operate in accordance with the Ethereum Network's rules, or due to cybersecurity attacks, security issues, or other unforeseeable problems.
Slashing risk: Staking may come with a risk of loss of virtual assets due to a process known as slashing. In the context of Ethereum, slashing occurs when a validator is found to be performing critical violations, such as double-signing, extended downtime or equivocating, by proposing or attesting to conflicting blocks. If any staking service provider to the Sub-Fund is slashed by the Ethereum Network, the Sub-Fund may be affected, leading to the loss of both rewards and principal. As a result of extended downtime due to the staking service provider’s inactivity, even if no slashing occurs, the Sub-Fund may not be able to benefit from rewards, and may incur penalties.
Staking features and liquidity risk: Staking features such as lock-up periods, staking reward payout periods and reward amounts are not necessarily fixed over time, and can cause liquidity risk or delay in settlement period. Staked assets cannot be transferred, sold or otherwise dealt with during the lock-up period. Further, staked assets may not pay out staking rewards daily, which may cause delays in reinvestment of the staking reward amount into the Sub-Fund.
Legal uncertainty risk: Due to the novelty of staking, there is no case law on ownership of staked assets. The legal uncertainty may affect the nature and enforceability of the Sub-Fund’s interest in the virtual assets of the Sub-Fund which have been staked.
Risk of unstaking process: Unstaking of ether will take time (from a few days to a few weeks), and during the unstaking process, the Manager will not be able to withdraw or liquidate the staked ether.
Volatility risk: Given the volatility of ether, the value of staked ether at the time of completion of the unstaking period may be significantly less than the value of the ether at the time a decision is taken to withdraw the staked ether.
Risk of entry queue period: There may be an entry queue period (i.e. waiting time that validators experience (after they have staked their ether) before they can start participating in the Ethereum Network) of up to a few weeks. Staked ether will not be eligible to receive any staking rewards and may not be withdrawn during the period.
4.Index risk
The Index is a new index which was launched on 11 September 2023 and has limited operating history. The Sub-Fund may be riskier than other exchange traded fund tracking more established indices with longer operating history. The Index has similar index methodology as CME CF Ether-Dollar Reference Rate which was launched on 14 May 2018, except for the index calculation time.
The Sub-Fund is also subject to the risk of system failures or errors of the Index Provider. If the computers or other facilities of the Index Provider, data providers and/or relevant Constituent Exchanges malfunction for any reason, calculation and dissemination of the Index may be delayed. Errors in the Index data, the Index computations and/or construction may occur from time to time and may not be identified and/or corrected for a period of time or at all, which may have an adverse impact on the Sub-Fund and its investors. Any of the foregoing may lead to the errors in the Index, which may lead to a different investment outcome for the Sub-Fund and its investors than would have been the case had such events not occurred.
5.Risks associated with virtual asset trading platforms
The virtual asset trading platforms that the Sub-Fund may acquire and dispose of ether which are still developing. The ether traded on these virtual asset trading platforms may be subject to lower liquidity compared to other spot ether trading venue. As such, there may be a delay in the Sub-Fund's ability to acquire or dispose of its investments from these virtual asset trading platforms. The bid and offer spreads of the price of ether on these virtual asset trading platforms may be large and the Sub-Fund may incur significant trading costs.
In the event that the virtual asset trading platform’s licence from the SFC is being revoked/terminated or otherwise invalidated, the Sub-Fund may be prohibited from conducting transactions and acquisitions of ether.
6.Difference between executable price of ether on virtual asset trading platforms and valuation price for subscription and redemption
The executable price of ether on the virtual asset trading platforms used by the Sub-Fund may not be the same as the traded prices of ether on the Constituent Exchanges used by the Index for valuation of the Sub-Fund. As such, depending on the circumstances, this may impact participating dealers and market makers’ ability to conduct effective arbitrage and provide liquidity for the Sub-Fund, which may lead to higher premium or discount to NAV and/or higher bid-ask spread of the Sub-Fund in secondary market. This may also result in higher tracking difference.
7.Custody risk
Ownership and rights to ether depend on securely storing and knowing the private key. If the private key is lost without a backup, access to the corresponding ether address is lost as well, with no possibility of restoration by the Ethereum Network.
While the Manager has conducted due diligence on the Sub-Custodian and believes that there are security procedures in place for the Sub-Fund by the Sub-Custodian, the Manager does not control the Sub-Custodian’s or the virtual asset trading platforms’ operations or their implementation of such security procedures and there can be no assurance that such security procedures will actually work as designed or prove to be successful in safeguarding the Sub-Fund’s assets against all possible sources of theft, loss or damage.
While the Sub-Custodian will store most of the Sub-Fund’s ether holdings in the cold wallet (i.e. where the private keys to ether are kept in an offline environment), the Sub-Fund’s ether may be temporarily held online in the hot wallet (i.e. where the private keys to ether are kept in an online environment) for meeting the needs of subscriptions and redemptions, which is more susceptible to cyber-attacks.
The Sub-Fund itself does not insure its holdings in ether. While the Sub-Custodian is required by the applicable laws and regulations to have in place a compensation arrangement to cover potential loss of client virtual assets through third-party insurance or other permitted means, such compensation arrangement is shared among all clients of the Sub-Custodian and is not specific to the Sub-Fund. There is no assurance that such compensation arrangement is adequate to protect the virtual assets of the Sub-Fund from all possible losses. Where the compensation arrangement of the Sub-Custodian is not sufficient to cover the loss of virtual assets of the Sub-Fund, neither the Manager nor the Sub-Fund will be responsible for the shortfall.
8.New product risk
The Sub-Fund is a passive ETF investing directly in ether. The novelty of such an ETF and the fact that the Sub-Fund is one of the first few spot virtual asset ETFs in Hong Kong makes the Sub-Fund potentially riskier than traditional ETFs investing in equity securities. Given the novelty of the underlying assets of the Sub-Fund, there is no guarantee that the service providers (such as participating dealers and market makers) can perform their duties effectively.
9.Concentration risk
The exposure of the Sub-Fund is concentrated in the ether via direct investment in ether. This may result in higher concentration risk and the Sub-Fund’s value may be more volatile than that of a fund having more diverse portfolio of investments. The value of the Sub-Fund is more susceptible to adverse economic, political, policy, foreign exchange, liquidity, tax, legal or regulatory event affecting ether.
10.Differences in dealing arrangements between Listed Class of Shares and Unlisted Classes of Shares
Investors of Listed Class of Shares and Unlisted Classes of Shares are subject to different pricing and dealing arrangements. The NAV per Share of each of the Listed Class of Shares and Unlisted Classes of Shares may be different due to different fees and cost applicable to each class. The trading hours of the SEHK applicable to the Listed Class of Shares in the secondary market and the dealing deadlines in respect of the Unlisted Classes of Shares are also different. For the avoidance of doubt, the dealing deadline applicable to the Listed Class of Shares in the primary market and the dealing deadlines in respect of the Unlisted Classes of Shares are the same.
Shares of the Listed Class of Shares are traded on the stock exchange on an intraday basis at the prevailing market price (which may diverge from the corresponding NAV), while shares of the Unlisted Classes of Shares are sold through intermediaries based on the dealing day-end NAV and are dealt at a single valuation point with no access to intraday liquidity in an open market. Depending on market conditions, investors of the Listed Class of Shares may be at an advantage or disadvantage compared to investors of the Unlisted Classes of Shares.
In a stressed market scenario, investors of the Unlisted Classes of Shares could redeem their Shares at NAV while investors of the Listed Class of Shares in the secondary market could only redeem at the prevailing market price (which may diverge from the corresponding NAV) and may have to exit the Sub-Fund at a significant discount. On the other hand, investors of the Listed Class of Shares could sell their Shares on the secondary market during the day thereby crystallising their
positions while investors of the Unlisted Classes of Shares could not do so in a timely manner until the end of the day.
11.Passive investments risk
The Sub-Fund is passively managed and, in general, the Manager will not have the discretion (except for exceptional circumstances such as a “hard fork” event) to adapt to market changes due to the inherent investment nature of the Sub-Fund. Falls in the Index are expected to result in corresponding falls in the value of the Sub-Fund.
The Sub-Fund invests in ether regardless of its investment merit and the Manager does not attempt to select other securities or virtual assets or to take defensive positions in declining markets.
12.Tracking error risk
The Sub-Fund may be subject to tracking error risk, which is the risk that it may not provide investment results that closely correspond to the performance of the price of ether as reflected by the Index. This tracking error may result from factors such as fees and expenses. The Manager will monitor and seek to manage such risk and minimise tracking error. There can be no assurance of exact or identical replication at any time of the performance of the Index.
13.Trading risk
Generally, retail investors can only buy or sell Shares on the SEHK. The trading price of Shares on the SEHK is driven by market factors such as the demand and supply of Shares. Therefore, the Shares may trade at a substantial premium or discount to the Sub-Fund’s NAV. As investors will pay certain charges (e.g. trading fees and brokerage fees) to buy or sell Shares on the SEHK, investors may pay more than the NAV per Share when buying Shares on the SEHK, and may receive less than the NAV per Share when selling Shares on the SEHK.
14.Trading hours differences risks
As ether is trading 24 hours but the Shares are not, the value of the investments in the Sub-Fund’s portfolio may change on days or at time when investors will not be able to purchase or sell the Shares.
15.Multi-counter risks
If there is a suspension of the inter-counter transfer of Shares between the counters and/or any limitation on the level of services by brokers and HKSCC participants, Shareholders will only be able to trade their Shares in one counter only, which may inhibit or delay an investor dealing. The market price of Shares traded in each counter may deviate significantly. As such, investors may pay more or receive less when buying or selling Shares traded on one counter on the SEHK than in respect of Shares traded in another counter and vice versa.
16.Reliance on market maker risk
Although the Manager will use its best endeavours to put in place arrangements so that at least one market maker will maintain a market for the Shares traded in each counter, and that at least one market maker to each counter gives not less than 3 months’ notice prior to the terminating market making arrangement under the relevant market maker agreement, liquidity in the market for the Shares may be adversely affected if there is no or only one market maker for the Shares. There is also no guarantee that any market making activity will be effective.
17.Termination risks
The Sub-Fund may be terminated early under certain circumstances, for example, where the Index is no longer available for benchmarking or if the size of the Sub-Fund falls below USD10,000,000 (or equivalent). Investors may not be able to recover their investments and suffer a loss when the Sub-Fund is terminated.