iShares MSCI Malaysia ETF is an exchange-traded fund incorporated in the USA (NYSE symbol -EWM) . The EWM is to provide investment results that correspond to the performance of the Malaysian market, as measured by the MSCI Malaysia Index. Simply means it mimic the index.
The EWM invests in a representative sample of index stocks using a "portfolio sampling" technique.
ETF is an investment fund and traded just like buying and selling shares.
The MSCI Malaysia Index measure the performance of the large and mid cap segments of the Malaysian market and currently it has 44
constituents or Malaysian shares. (FBMKLCI has only 30 shares of big cap companies)
Who is MSCI. .
MSCI Inc. is a Global provider of equity, fixed income, hedge fund stock market indexes, and multi-asset portfolio analysis tools. It operates in similar to FTSE Ltd (partly owned by London Stock Exchange) and Standard & Poor's ( publisher of the SP500 and Dow Jones Industrial Index). MSCI was founded by Morgan Stanley, a US investment bank.
MSCI Malaysia Index is widely follow by foreign fund managers who invested shares in Bursa Malaysia. These fund managers basically buy and sell EWM for the need to be invested in Malaysian shares without holding any of those shares, and hedging. Some sort similar to Bursa derivative market (BDM) Kuala Lumpur Stock index future ie FKLI.
Hedging using EWM
Let say, a fund has subscribed to IPO of Malakoff Bhd at 1.70 in 2014. By the end of 2015, Malakoff price fall to RM1.40. When Malakoff price keep falling, the fund manager has 4 alternatives.
1. Cut loss ie sold the shares with a loss.
2. Hold the shares and by end of 2015 financial provide the impairment (TH screw up on this)
3. Average down ie buying further Malakoff shares to average down the cost of holding.
4. Hedging. This last alternative is not allowed for unit trust such as ASB but hedge fund and non unit trust investment managers can used this hedging mechanism.
The easiest hedging for holding Malakoff shares is buying a put option. A put option is the right to sell. Let see...Hold Malakoff shares at RM1.70 a shares. A put option was bought with a strike price of RM1. 70. We paid the premium for the put option and hang on. By end of 2015 when Malakoff fall to RM1.40 we settle the deal by delivering Malakoff shares at RM1.70 to the seller of put option. In reality Buying /Selling put and call option is more complex than above. Option trading is offer by Bursa Malaysia but never commercially take off since local investors are not that sophisticated.
Hedging using EWM or FKLI is simply taking the opposite direction. By holding (buying) Malakoff, the management will sell EWM. Theoretical, you sell EWN when Malakoff was at 1.70. As overall stock market fall and Malakoff price fall to 1.40..EWM which is based on Index also fall. So we buy back EWM at lower price than when we sell ie short selling. The profit from EWM will offset the loss for Malakoff. This is the basic mechanic of hedging using EWM or FKLI...on reality it is more complex and involve statistical and financial calculation.
So as we can see, as the market fall foreign fund managers have dump substantial shares earlier. Since they are hedging, they will continued dumping the balance of the shares to pull down the index and subsequently the EWM further to make more profit on the short selling of EWM. The net effect is that the profit from short selling EWM is greater than the loss of selling the shares.
This is the game of vultures ie the foreign fund managers.... and Bloomberg who livelihood depend on vultures subscribing to their network keep spewing news slanting in favour of the vultures.
