Silver LOF: One generation has its own tiered B

Author: Shen Hui & Zhang Jieyu, Yuanchuan Investment Commentary

Before January 30, Guotou Ruixin Silver LOF increased by 263.13% over the past year, ranking first in the market among all public offering products.

As the only fund on the mainland that can invest in silver futures, despite releasing 20 intensive warnings about premium risk since the beginning of the year, it still couldn’t suppress the market’s animal spirits and frantic enthusiasm for long positions. Silver LOF was repeatedly pushed to the daily limit up, even hitting an intraday premium of 61.6%.

Internet “wool party” members then followed one after another, giving rise to the most疯狂拼好饭 (crazy “competing for good rice”) market in the history of public funds.

If you think going to work every day is like a funeral, just spend some time fishing in your securities account to subscribe to 100 yuan worth of silver LOF, then sell it two days later like stocks, and the 50-plus yuan intraday premium arbitrage profit will fall from the sky, making the tiny red envelopes of Yuanbao look pale in comparison. If you mobilize all six family wallets, find a broker with a 10% subscription fee and five free, cut costs and increase income, maybe you can even go to Xinrongji for New Year’s Eve dinner.

Because of this, during the hot market, 400,000 people joined this arbitrage in one day.

But all of this has an important but often forgotten premise—the silver price must not fluctuate wildly.

Unsurprisingly, the inevitable happened, and the celebration was soon interrupted by a collapse in silver prices.

Last Friday, silver spot prices plummeted by 26%, setting the largest intraday decline in history. On Monday, the silver LOF resumed trading with a limit-down, and after hours, Guotou Ruixin valued it at -31.5% based on international futures prices. Whether chasing the limit-up or wool-shearing, everyone fell silent that night:

This move caused the actual premium rate in the market to soar above 100%, and at least several limit-downs are expected later. If investors did not withdraw immediately before last week’s suspension, they are now stuck with their doors welded shut and face a heavy beating.

The theme of bull markets, soaring premiums, endless arbitrage posts, and violent net value declines—history seems to enter a certain cycle. Similar scenes evoke memories of the 2015 bull market, which was equally fiery, ultimately leaving behind a trail of wreckage in the form of graded B-shares.

“Downward Adjustment” Crisis

To address the gap between international silver prices and the Shanghai silver limit-up/limit-down restrictions, Guotou Ruixin announced last night a -31.5% decline for the silver LOF off-market fund, setting a new record for the largest single-day decline in public funds ever.

However, the way this record was set is full of controversy.

On the evening of February 2, Guotou Ruixin announced that the old valuation method could no longer objectively reflect fair value and that it would be based on international asset prices, ultimately recording a 31.5% decline. If the valuation method had not been changed, based on Shanghai silver futures, the net value would have only fallen by about 17%, meaning a 14.5% difference. Those who bought A-shares for arbitrage or bought C-shares to go long on silver were all caught off guard:

This almost unilaterally adjusted valuation naturally triggered investor dissatisfaction:

First, the late-night announcement caught redemption investors off guard, causing a psychological blow akin to accidentally bottom-fishing in the last bull market’s split B-shares and then immediately facing a downward adjustment, as if their bodies were drained by the shock.

Second, when prices rise, net values follow Shanghai silver; when they fall, losses are responsible for global citizenship. Suddenly changing valuation rules seems unfair—it’s like Barcelona scoring three offside goals in the Champions League final, and UEFA announcing that offside rules are canceled and all goals are valid.

Guotou Ruixin responded that if they announced this in advance, they would worry about being interpreted as intentionally guiding investors not to redeem, which could lead to serious liquidity issues and market panic, causing a run on the fund.

If they had used the original valuation method, recognizing a 30%+ decline in one go, it would have taken several days to complete the decline. Sharp investors could have quickly rushed to form a run, making it difficult for Guotou Ruixin to sell on the futures side. The implied liquidity risk is severe. From the perspective of quickly and steadily eliminating operational risks, it might seem reasonable.

But for wool party members rushing to arbitrage on “intraday premium,” it’s a huge blow—when submitting redemption orders, the rules are still the original ones, expecting to profit again from the Shanghai silver trading mechanism. Who knew the final whistle would blow, and the fund company would come out saying rules had to change? No one can escape.

For retail investors rushing into C-shares, expecting to ride the silver rally, they are only investing in a Shanghai silver futures fund, but they experience the brutality of the international futures market; for those excited about huge arbitrage opportunities and switching from off-market to on-market A-shares, they find themselves still far from their dream of “risk-free arbitrage.”

This lesson was already taught in 2015. After the June bull market peak, most stocks hit limit down, and the most innovative public offering product at the time—graded B-shares—began to show “arbitrage” opportunities—some graded B-shares’ net values fell 20%-30% daily, while their trading prices only declined by about 10% daily.

This caused two problems: the lower-net-value graded B-shares’ premiums soared above 100%[1]; meanwhile, the “priced but not traded” premium rate trapped investors holding graded B-shares on the limit-down, unable to exit at fair prices, and passively experiencing downward adjustments, further enlarging losses.

In the last bull market, many only knew that graded B-shares had leverage when prices rose, but didn’t realize they had downward adjustment mechanisms when prices fell too much. After breaking below 0.25, the fund would ignore your high purchase price (e.g., 0.5 yuan) and forcibly convert based on the real low net value, instantly wiping out the high premium bubble you paid, leading to huge losses of up to 50% or more.

Some investors still bought on the downward adjustment date, like moths to a flame, but when the market plunged, most lacked the ability to catch the falling knife—only to be sacrificed. The downward adjustment of graded B-shares was not subject to the will of bottom-fishers, resulting in the most tragic battlefield of the 2015 stock market crash.

This ultimately caused this once-innovative, highly touted graded fund to be completely pushed out of the industry’s stage on the shameful pillar.

It’s important to note that silver LOF itself has no downward adjustment mechanism, but the free fluctuation of international silver prices and the bug in Shanghai silver’s limit-up/limit-down restrictions, combined with the last-minute revision of valuation rules, caused the new generation of holders to also experience the “leverage” feeling of graded B-shares.

Did this bug exist beforehand? Yes. But did people realize it? Perhaps even Guotou Ruixin was unprepared, which is why they hurriedly issued this inevitable, criticized solution at 10 pm.

Bull Market Mirror

Looking back at the two bull markets involving silver LOF and graded B-shares, it’s like history doesn’t just monotonously repeat but always carries similar echoes.

Graded B-shares left a bad memory for veteran investors because of their leverage attributes. Graded funds split the parent fund into A-shares (stable income) and B-shares (aggressive leverage). B-shares borrow from A-shares, earning interest, while B-shares absorb volatility—amplifying gains when rising, suffering multiple losses when falling. If the downward adjustment mechanism is triggered, losses are further magnified.

Silver LOF, although not inherently leveraged, the high volatility of precious metals and the “rule risk” of the underlying assets pose huge blind spots for many buyers.

From an emotional perspective, losing money in a bull market is painful, but seeing friends profit is even more heartbreaking. Extreme FOMO (fear of missing out) psychology drives the use of highly volatile tools to overtake rivals. Whether it’s now silver LOF or back then graded B-shares, both were snapped up at obvious premiums.

High premiums attract swarms of arbitrageurs like locusts.

In June 2015, the size of graded funds soared to 500 billion yuan, with 41 graded funds doubling in net value over half a year. Private equity tycoon Wang Penghui’s investment in ChiNext B-shares doubled. Due to continuous suspension of subscriptions and redemptions, ICBC 100B hit 8 limit-ups in a row, with a premium rate reaching 78.29%. The Belt and Road B-shares grew 11 times in a week, with nearly 4 billion yuan in arbitrage profits.

At that time, the “Graded Fund and Investment Strategy” red book was published, with Gao Zijian, chief of Zhengjin Industry, writing a passionate endorsement: graded funds are a unique product in China’s capital market, leading globally.

Just like many learned about silver LOF arbitrage from Xiaohongshu, at that time, public accounts and Jisilu were full of arbitrage posts. Juqun also explained graded fund arbitrage—under bullish optimism, B-shares would appear with premiums due to frantic buying, while A-shares would be discounted due to lack of interest. If the sum of A and B prices still showed a premium compared to twice the net value of the parent fund, it would attract arbitrageurs to eat up this premium.

Interestingly, holders of graded B-shares developed quantitative arbitrage products like Fushan, Mingxun, Tianyan, and Shen Yi. As early as 2013, Qiu Huiming joined Fushan to develop the Zhiyuan CTA product line, including graded fund arbitrage and cross-market commodity arbitrage strategies. Just a year later, he left to establish Mingxun, and Fushan gradually faded from the front line, with Mingxun becoming a leading industry player.

This round of silver LOF arbitrage is a grassroots arbitrage, with institutions sidelined.

Since October last year, the A-shares of silver LOF experienced a process of purchase restrictions from 6,000 yuan to 100 yuan, then 500 yuan, and finally suspension on January 28. On one side, silver surged to an “epic cup-and-handle,” while on the other, arbitrage capacity was extremely limited, causing the silver LOF premium to soar over 30%. Under Xiaohongshu’s step-by-step tutorials, retail investors flocked in, and the silver LOF shares grew by 4 billion yuan just in Q4.

Faced with soaring premiums, Guotou Ruixin couldn’t lift the purchase restrictions and could only issue powerless warnings about premium risks daily. Because public funds generally face dual restrictions on speculative positions in silver futures: first, a single public fund’s position in a single silver futures contract cannot exceed 10%; second, the overall speculative position limit is 18,000 lots.

When the fund’s size hits the ceiling of silver futures positions, subscriptions must be suspended. The mismatch between speculative demand and supply can only be resolved by a sharp drop in silver prices, ending the premium situation.

It’s proven that no matter how many risk warning notices the fund company issues, if they only vaguely state, “The trading price in the secondary market of this fund, besides the risk of fluctuations in fund share net value, will also be affected by market supply and demand, systemic risks, liquidity risks, and other factors, which may cause investors to face losses,” they will be ignored by ordinary retail investors lacking imagination about losses.

When fund companies write vague words like “net value fluctuation risk, market supply and demand, systemic risk, liquidity risk,” have they ever thought that these risks might manifest in today’s way someday?

If the institutions themselves didn’t anticipate it, how could many inexperienced investors foresee? If they could foresee, why not clarify the “risks” more explicitly in repeated risk warnings?

Epilogue

When the public’s bull market sentiment reaches its peak, is the purchase restriction really useful?

In 2016, real estate purchase restrictions kept piling up, but couldn’t stop people from fake divorces, fake income proofs, or social security registration in different places to buy more houses; in 2021, star public funds’ hot products were also subject to purchase limits or proportional allocations, but couldn’t stop the public’s enthusiasm for borrowing money to subscribe, fearing insufficient allocations.

The essence of a fast bull is excess liquidity.

As long as emotions remain, the words “purchase restriction” will automatically translate into “scarcity”; but when a sharp decline begins, all risk warning notices will become useless scraps of paper amid the surging public opinion.

Each generation has its graded B-shares, and the next time it won’t be silver LOF again. Perhaps all people can learn is that when they see “purchase restrictions can’t stop buying enthusiasm,” they should first weigh their own capacity, check their investment records, and then try to hold back their hands. Focus all energy on controlling themselves, and maybe even stop scrolling social media altogether.

Every year’s college entrance exam questions are different, but that doesn’t mean studying “Five Years of College Entrance Exam Questions and Three Years of Simulations” repeatedly is useless.