After its first-ever full-day trading halt, SDIC UBS Silver LOF extended its suspension again on January 23, pausing trading until 10:30 a.m. The fund warned that if its secondary-market premium failed to cool, it could seek additional intraday halts or longer suspensions from the Shenzhen Stock Exchange.

When trading resumed, volatility surged. The fund’s net asset value briefly jumped 7.65% before prices reversed sharply late in the session, plunging more than 8% at one point and then rebounding—an extreme intraday swing that underscored heightened speculative activity. The fund closed at RMB 3.875, down 1.15% on the day, while still trading at a striking 50.89% premium to NAV.

Despite repeated regulatory interventions, the premium has remained stubbornly elevated. Since December, the fund has issued 35 warnings related to excessive secondary-market pricing across 38 trading days. Those actions included 22 trading halts, three adjustments to subscription limits, and one temporary suspension of subscriptions altogether.

Market performance highlights the imbalance. Since December, the fund’s NAV has climbed 258.7%, while its market price has consistently traded at a premium above 50%. That gap has fueled a wave of retail arbitrage strategies—subscribing in the primary market and selling in the secondary market to capture the spread.

Under normal circumstances, such arbitrage activity would help narrow price discrepancies between a fund’s NAV and its trading price. LOF products allow investors to move between primary subscriptions and secondary-market trading, and while settlement delays and purchase caps can reduce efficiency, price gaps typically compress over time. In the case of SDIC UBS Silver LOF, however, that mechanism has effectively broken down.

The root cause lies in the fund’s underlying exposure. It is the only publicly offered fund in China primarily invested in silver futures, tracking the benchmark silver contract on the Shanghai Futures Exchange (SHFE).

Futures exposure, however, comes with strict regulatory limits. Under SHFE risk-control rules, public mutual funds—classified as non-futures-company participants—are subject to a speculative position cap of 18,000 silver futures contracts in regular months. This cap places a hard ceiling on the fund’s ability to expand, regardless of investor demand.

That constraint is already binding. As of January 21, open interest in the benchmark silver futures contract (AG2604) totaled roughly 302,200 contracts. SDIC UBS accounted for about 9.93% of that figure, nearing the regulatory threshold that prevents a single public fund from maintaining more than a 10% share of open interest for an extended period—a level regulators view as potentially market-distorting. In practical terms, the fund has little room left to grow.

This helps explain the fund manager’s repeated use of subscription limits and trading halts. Reopening subscriptions would require the manager, under the fund’s mandate, to deploy most new capital into silver futures to maintain exposure above 90%. But with futures positions capped, excess inflows would be forced into cash or low-yield assets, creating significant tracking error and operational risk—and potentially violating the fund’s contractual obligations.

As a result, suspensions and purchase restrictions have become the fund’s primary tools for managing regulatory and structural constraints.

At current levels, the fund’s premium has detached from the fundamentals of silver itself, turning the product into a vehicle driven largely by speculative momentum rather than underlying value.

Looking ahead, a pullback in silver prices could quickly deflate market enthusiasm, triggering a rush for the exits and forcing the fund’s trading price to converge with NAV—possibly through consecutive limit-down sessions. Even if silver prices remain stable, investors buying at a 50% premium face the risk of steep losses as prices normalize.

Alternatively, regulators and fund managers may attempt to engineer a gradual return to more rational pricing, easing the premium without severe market disruption. Achieving that outcome, however, would require careful coordination—and a willingness from investors to accept that premiums, unlike silver prices, are not built to last.