Our market update is a collaboration between the KraneShares internal research department and our industry-leading subadvisors and partners. Our research covers global growth themes in both public and private markets.
Hedges may have imperfect matching between the derivative and the underlying security; there is no assurance that hedging will be effective. Hedging may reduce or eliminate losses or gains.
Options are derivative contracts that give the holder, for a premium, the right to buy or sell an underlying asset at a set price within a specified period, while the writer must fulfill the obligation if exercised. Their value is highly sensitive to factors such as changes in the underlying asset, interest and currency rates, implied volatility, time to expiration, and global economic or political events. These instruments can be illiquid and may not perfectly track the reference asset. Writing options can reduce market risk but limits upside potential, while purchasing options risks losing the premium paid. Market disruptions or lack of liquidity may impair strategy effectiveness, so options may not always reduce volatility and could result in losses.
The Fund earns option premium income from selling options, which is generally classified as a return of capital for financial reporting and shown as such on monthly 19(a) notices. These notices, however, do not reflect the tax treatment, which is determined after year-end. For tax purposes, this income is typically considered taxable investment income and may not reduce your tax basis in Fund shares when distributed. The use of options involves risks and strategies that differ from traditional securities. Options prices can be highly volatile and influenced by changes in the underlying asset, interest rates, currency exchange rates, and market expectations. Options may be illiquid or imperfectly correlated with the underlying asset. Purchasing options can result in the loss of the entire premium, while writing options may limit gains and create significant obligations if exercised. Market disruptions or lack of liquidity may reduce the effectiveness of options strategies, and there is no guarantee they will reduce portfolio volatility.
Certain derivatives, including options, may be centrally cleared through a clearing house such as the OCC, which introduces risks related to margin, commingled accounts, and clearing member defaults. If a clearing member or the OCC fails to meet obligations, the Fund could suffer losses.
Futures contracts also involve risks, including imperfect correlation with reference assets, potential illiquidity, and substantial daily margin calls that may require selling securities at disadvantageous times.
Swap transactions generally do not involve delivery of the reference asset or notional amount, and losses are typically limited to net payments owed. Swaps are of limited duration, and the ability to maintain or renew positions depends on available counterparties and agreed terms. Limited counterparties or defaults could impair the Fund’s ability to implement its investment strategy.
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