China’s flagship silver fund suffered a record collapse after its manager overhauled the way the product is valued, exposing investors to the full force of a global precious metals sell-off.
According to Bloomberg, UBS SDIC Fund Management Co. revised the valuation model of its $2.2 billion UBS SDIC Silver Futures Fund LOF to reference silver futures prices on major global markets, rather than those listed on the Shanghai Futures Exchange.
The change took effect on Monday and resulted in a 31.5% drop in the fund’s net asset value, the steepest single-day decline on record for the product.
UBS SDIC, a joint venture between UBS Group AG and a unit of China’s State Development and Investment Corp, said the adjustment was necessary to “timely and fairly reflect the true value” of the fund’s underlying assets, Bloomberg reported. Under the previous model, Shanghai-listed futures — which are subject to a 17% daily price limit — were unable to fully capture sharper global price swings.
The fund, China’s only pure-play silver vehicle, had attracted heavy retail inflows during last month’s precious metals rally, pushing its market price to a significant premium over NAV. That surge prompted repeated risk warnings and a suspension of new subscriptions late last month, Bloomberg noted.
The UBS SDIC Silver Futures Fund LOF briefly halted trading and turned away new investors last week, amid surging inflows and elevated volatility.
Silver prices collapsed late last week, with Comex futures tumbling more than 30% over two sessions, ending a speculative rally partly fuelled by Chinese retail participation. The valuation reset also meant investors redeeming units after the change locked in additional losses, fuelling criticism on social media.
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UBS SDIC said it would revert to using Shanghai settlement prices once domestic futures again “reflect the characteristics of active trading markets.” Chinese regulators have since urged institutions to strengthen risk controls and remind investors to trade rationally, according to Bloomberg.
A rally that ran too far, too fastThe turmoil comes against the backdrop of an extraordinary rally in precious metals. Gold surged to a record above $5,300 an ounce last week and is up more than 20% this year, driven by US dollar weakness and investor flight from sovereign currencies and bonds. Silver’s move has been even more dramatic, rising about 60% in just four weeks, with increasingly chaotic daily swings.
Local prices in China have traded at even steeper levels — even after factoring in the 13% value-added tax on local imports — reflecting intense retail demand. That surge pushed the UBS SDIC fund to trade at a significant premium to its NAV, prompting repeated risk warnings and a suspension of subscriptions late last month.
The subsequent collapse has highlighted the risks of frenzied participation in commodity markets. Regulators have since urged institutions to strengthen risk management and caution investors to trade rationally, underlining how quickly momentum-driven rallies can unwind.
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