The world of investment has recently seen the emergence of strict purchase limits on certain funds, particularly within the realm of out-of-market index fundsOn February 25, Huasan Fund made headlines as it announced that six ETF-linked funds and seven index funds would cease accepting large purchases and transfersThis decision is reflective of the growing caution among fund managers amid concerns about maintaining the performance and stability of these financial instruments.

Specifically, these funds will restrict individual fund accounts to a maximum of 1 million yuan in cumulative purchases per dayIt’s notable that these funds generally represent a lower entry threshold for investors, indicating that they are more accessible to the general public compared to their larger counterpartsDespite their accessibility, the assets of many of these funds hover under 50 million yuan as of the fourth quarter of 2024.

The recent actions may remind investors of a previous controversy regarding a particularly small-linked fund – the Huatai-PB Zhongzheng Shanghai-Hong Kong-Shenzhen Cloud Computing Industry Link FundThis product had come under fire due to significant discrepancies between its daily returns and the net value fluctuations of its tracking target, inciting frustration among investorsThe core issue at hand was linked to the sudden influx of net subscriptions that overwhelmed this smaller fund, leading to its underperformance.

Despite experiencing these challenges, the investment community remains curious about Huasan Fund’s decision to impose a purchase limit of 1 million yuan on what could be perceived as merely a marketing gimmick for these small-scale funds eager for publicity.

On February 24, Huasan Fund publicized the announcement concerning the purchase impossibilities for thirteen of their out-of-market index funds, alongside one QDII fundAmong the restricted out-of-market index funds are six ETF-linked funds targeting various market sectors, including A-share technology and dividend sectors

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The remaining seven stock index funds branch out across diverse industries such as robotics, cloud computing, big data, infrastructure, medical devices, and non-ferrous metal mining.

In the official statement, Huasan Fund justified this temporary halt on high-volume purchases as a means to ensure the smooth operation of the funds while safeguarding the interests of existing fund holdersHistorical patterns show that when the market style remains stable, imposing purchase limits becomes a strategy employed by fund managers to prevent an influx of funds from diluting the returns for current investors in high-performing funds.

Interestingly, amid favorable conditions, these restricted products have demonstrated strong performance in terms of returns, particularly in a market environment favoring technology growthNotably, several theme-based index funds, such as the Information Technology Application Innovation Industry Index, the Robotics Industry Index, and the Cloud Computing and Big Data Theme Index, reported returns exceeding 20% since the year's inception.

However, the majority of these funds are characterized by their small sizesAs such, the asset scales of products like the Huasan Zhongzheng Non-ferrous Metal Mining Theme Index Fund, Huasan Zhongzheng All-Index Medical Device Index Fund, and Huasan Zhongzheng Information Technology Application Innovation Industry Index Fund fall below 20 million yuan.

In the upper brackets, some products, such as the Huasan Zhongzheng Infrastructure Index Fund and the Huasan Zhongzheng State-Owned Enterprise Dividend Link A, have asset sizes ranging between 20 million and 30 million yuanOnly a couple of products, like the Huasan SSE Sci-Tech Innovation Board New Generation Information Technology ETF, surpass the 30 million yuan mark, showcasing the petite scale of these funds.

Examine the ETF linked funds that these products trace; their scales are far from massiveFor instance, as of February 24, the Huasan SSE Sci-Tech Innovation Board New Generation Information Technology ETF and Huasan Zhongzheng Electronic 50 ETF sit at 14.8 million yuan and 21.1 million yuan, respectively.

Moreover, it’s worth highlighting that apart from Huasan, other funds such as Huatai-PB Zhongzheng Dividend ETF Link Fund and Wanjiabei Zheng 50 Component Index Fund have also recently announced purchase limits

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Notably, the Huatai-PB Zhongzheng Dividend ETF Link Fund, with a small asset scale of merely 3.6 million yuan, also imposed purchase restrictions on February 20, which were later lifted on February 25 to allow large purchases again.

Industry insiders convey that the 1 million yuan purchase limit is effectively unlikely to impede marketing for these related fund products on the internetFurthermore, smaller scale funds generally lack attraction for the larger institutional investments.

“Is the existence of small scale index products merely a marketing gimmick?” queried one observerThey noted that if only a handful of fund companies make such moves, it likely does not signal a significant trend across the industry.

Interestingly, some technology-oriented ETFs have attracted considerable capital influx latelyBetween February 5 and February 24, notable ETFs such as the Huaxia Robotics ETF and E Fund AI ETF saw net inflows of approximately 2.771 billion yuan and 2.768 billion yuan, marking them among the top net inflow stocks during that timeframeOther ETFs like E Fund Cloud Computing ETF, Harvest Software ETF, and Tianhong Robotics ETF also reported net inflows crossing 1 billion yuan.

This move towards imposing purchase limits appears to be a precautionary effort considering the deluge of capital flooding into the technology sectorsJust recently, a hedge fund linked product faced scrutiny due to a significant deviation in daily return rates compared to the ETF it tracked, raising questions among investors about potential mismanagementA swift response from the fund attempted to clarify that such discrepancies arose from a sudden influx of capital into the linked fund.

Reflecting on this phenomena, Wind's record from February 14 showed that while the Huatai-PB Cloud Computing ETF boasted a daily return rate of 4.84%, the linked Huatai-PB Zhongzheng Shanghai-Hong Kong-Shenzhen Cloud Computing Industry Link Fund only yielded a meager 0.59%.

The perplexed investors took to social media to voice their frustrations, speculating that there were shady practices influencing the performance results

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Consequently, Huatai-PB Fund acknowledged the situation and attributed the performance differences to a recent spike in net subscriptions, which led to an inflated dependency on cash assets held within the fund, thus diluting performance returns.

Furthermore, Huatai-PB Fund committed to restoring the fund's structure according to the corresponding prospectus agreements, aiming to rectify the proportional holdings of the reference ETF in short order.

As market adjustments began to take hold, the divergences in performance figures started to diminish, indicating a steady trend towards aligning the performance metrics of the linked fund with those of the respective ETF.

In practical terms, from February 17 onward, the performance disparity for the Huatai-PB Zhongzheng Shanghai-Hong Kong-Shenzhen Cloud Computing Industry Link Fund began to gradually shrinkNotably, on February 17, the return rate for this linked fund was 0.57%, while the tracked Huatai-PB Cloud Computing ETF recorded a return rate of 1.79%. The following day, the figures inverted when the ETF saw returns of -2.21%, while the linked fund’s results recorded -1.77%.

In light of the rapid influx of capital, other industry insiders have stressed that when significant funds swarm into a linked fund, it creates constraints on operational managementEssentially, when larger sums of money are temporarily held in cash, the ability to capture market opportunities diminishes, leading to performance gaps relative to the tracking benchmarksConsequently, the recent limits imposed on thematic linked funds may well be aimed at mitigating the risk of substantial capital injections that could disrupt fund operations.

Ultimately, before the scrutiny arose, the Huatai-PB Zhongzheng Shanghai-Hong Kong-Shenzhen Cloud Computing Industry Link Fund pre-emptively released a purchase limit announcement, adjusting the cap on large purchases from 1 million yuan down to 10 thousand yuan, emphasizing their focus on protecting current investor interests amidst market volatility.

Market analysts advocate for investors to proceed cautiously when selecting small-scale out-of-market index funds, noting factors such as potential liquidation risks and the possibility of disproportionate impacts on profitability during surges in market demand

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