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.
The Underlying Stock is exposed to numerous risks that can impact its revenues and viability, such as price volatility, management, inflation, global economic conditions, and natural disasters. Its performance may be influenced by trends in commerce, cloud computing, international trade policies, and regulatory changes. The Fund’s daily returns rely on the Underlying Stock’s performances and volatility. Issuer-specific factors may increase Fund investment volatility compared to the overall market. The underlying stock faces risks from competition in e-commerce, economic uncertainties, demand declines, revenue concentration, geopolitical events, intellectual property issues, exchange rates, reliance on third-party manufacturing, shortages, cybersecurity threats, system failures, rising costs, government regulations, compliance expenses, litigation, taxes, debt, and talent retention. The Fund aims for daily investment results of 200% of the daily percentage changes of the Underlying Stock. Its performances over longer periods will likely differ from the Underlying Stock due to compounded returns, which significantly affect leveraged funds.
If the Underlying Stock performs poorly, the dollar losses for shareholders will be smaller if their investments have already decreased. Conversely, if the stock performs well, future losses will be larger as the investment values have increased. Compounding effects become more pronounced with higher volatility and longer holding periods, impacting shareholders differently based on their investment durations and the stocks’ volatility.
Various factors can impact the Fund’s correlations with the Underlying Stock, and achieving high correlations is not guaranteed. If the Fund fails to achieve correlation, it may not meet their investment objectives, with NAV changes varying significantly from 200% of the Underlying Stock’s changes. To maintain correlations, the Fund attempts daily rebalancing for consistent exposures. Major deviations can increase leverage risks. Market disruptions and volatility can hinder the Fund’s ability to adjust. Target exposures fluctuate, making perfect 200% exposures unlikely, especially on volatile days. Other elements, like fees and market conditions, can also affect correlations.
The Fund may change positions for tax efficiency, which could harm correlations. Large asset movements or trading discrepancies may lead to under- or overexposures, reducing the Fund’s ability to meet its daily objectives. The Fund uses leverage to gain investment exposure beyond its net assets, leading to potential greater losses in adverse conditions than non-leveraged funds. A decline in the Underlying Stock’s daily performance can magnify losses, decreasing the Fund’s values by 2% for each 1% drop, excluding costs. Losses could exceed net assets if the Underlying Stock falls over 50%.
Due to limited investments, the Fund may need to limit or suspend the creation or redemption of Creation Units. During these times, shares might trade at significant premiums or discounts to their net asset values. If creations are halted, large redemptions could force the Fund to sell securities at unfavorable prices, increasing costs and taxable distributions to shareholders.
The Underlying Stock is listed on an exchange, but an active trading market isn’t guaranteed, and trading can be halted. A halt in the Underlying Stock usually leads to a halt in the Fund’s shares. Trading may stop due to market conditions or exchange decisions, and halts can occur from extraordinary volatility under circuit breaker rules. Extended trading halts may hinder the Fund’s ability to arrange necessary swaps for its investment strategy.
Narrowly focused investments typically exhibit higher volatility. The Fund’s assets are expected to be concentrated in a single stock. The securities or futures in that concentration could react similarly to market developments. Thus, the Fund is subject to loss due to adverse occurrences that affect that concentration. In addition to the normal risks associated with investing, investments in smaller companies typically exhibit higher volatility.
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