The concept that "free can be the most expensive" is being starkly illustrated. On February 6, 2026, SDIC Silver LOF opened limit-down again, quoted at 3.099 yuan. This marked the fund's fifth consecutive trading day hitting the daily loss limit. By the market close on February 6, sell orders piled up at the limit-down price amounted to nearly 7.5 million lots, while the trading volume was 201 million yuan. The premium of the fund's market price over its net asset value remained at 28.75%.
The trigger for this limit-down storm was not a crash in silver prices, but an announcement adjusting the fund's valuation method, released after market hours. The crisis, evolving from frenzied premium to frozen liquidity, is far from a simple market fluctuation; it represents a dynamic contest involving market mechanisms and rules.
The seeds of this crisis were sown as early as December 2025. As a scarce listed fund in the domestic market that directly invests in silver futures, SDIC Silver LOF became a target for capital chasing gains during the silver price rally. From December 22 to 24, 2025, the fund hit the daily gain limit for three consecutive sessions, with its premium rate soaring to a staggering 68%.
The root of the high premium lay in the product's scarcity and inherent flaws in the arbitrage mechanism. When position limits on silver futures led to the fund imposing strict long-term purchase restrictions, a large amount of capital unable to subscribe through the primary market turned to the secondary market, further amplifying speculative sentiment.
On social media, widely circulated "LOF arbitrage tutorials" attracted a crowd of new investors and young professionals to jump in collectively. These tutorials painted an enticing mathematical model: buying at a high premium rate, even if facing consecutive limit-downs, could theoretically ensure breaking even or even profiting due to the premium cushion.
The principle of LOF arbitrage primarily leverages the fact that subscriptions and redemptions are transacted with the fund company at the day's closing NAV. When the secondary market price is higher than the NAV, creating a premium, investors can execute a premium arbitrage strategy. The operation is not overly complex: subscribe for the fund units and then sell them on the secondary market at the market price.
One LOF arbitrage guide stated: "With a daily price limit of 10%, and a T+2 settlement cycle, even if it falls 10% daily for two days (20%), and assuming it falls another 10% on the third day when you can sell, that's a total of 30%. Adding transaction costs (typically 1.5% within 7 days) and subscription fees (estimate 2%), the expected loss is around 32%. Facing a 45% premium rate, there's still a 13% buffer."
This narrative attracted a flood of novice investors, who poured into the market and pushed the premium even higher. However, this approach overlooked the prerequisite for the model's validity: constant market rules and perpetual liquidity.
Specifically, this so-called "risk-free" arbitrage mechanism has a natural flaw: the time lag. LOF subscriptions and redemptions require T+2 settlement, and the NAV is disclosed only once daily. When market sentiment reverses, this mechanism cannot quickly correct the premium, instead leading to a persistent deviation between price and NAV. Furthermore, the source of the high premium is partly due to price limits in the domestic futures market. When international market volatility far exceeds these limits, it can cause the fund's NAV to deviate; successful long-term arbitrage would require continuously rising silver prices.
Facing persistently high premium risks, SDIC Silver LOF issued premium risk warnings almost daily starting December 2025 and suspended subscriptions on January 28, 2026, attempting to cut off the source of arbitrage capital.
The true rule change occurred after the market close on February 2, 2026. That evening, SDIC UBS Fund Management announced an adjustment to the valuation method for the silver futures contracts held by SDIC Silver LOF. The direct result of this adjustment was a significant 31.50% drawdown in the NAV for February 2. Crucially, this adjustment was applied retroactively to units traded on February 2, affecting not only redemptions executed during trading hours on February 2 but also those processed after the close on January 30, and over the weekend of January 31 and February 1.
The risk finally erupted. In the following trading sessions, SDIC Silver LOF experienced consecutive limit-downs.
The fund company explained that, during recent extreme market conditions, single-day volatility in major international silver markets far exceeded the price limits of SHFE silver futures. Continuing to value the fund based solely on the SHFE settlement price might prevent the NAV from fully and timely reflecting the true fair value of the underlying assets.
In reality, risks often lurk when the market is most euphoric. An asset management professional noted that when an investment strategy is simplified into a "risk-free arbitrage" label and widely circulated on social media, it may be accumulating significant systemic risk. "The consecutive limit-downs of SDIC Silver LOF undoubtedly reflect a major disconnect between perceived liquidity and actual liquidity in social media-driven investment frenzies. While the fund appeared highly active and attracted many new investors during the social media hype, when sentiment reversed, these investors attempted to exit almost simultaneously, creating a liquidity crunch."
This liquidity crisis has also raised strong questions about the fairness of the rule change. Investment decisions made during trading hours on February 2 were based on the then-effective NAV calculation rule (referencing the SHFE settlement price). The fund company's post-close rule change and its retroactive application meant investors bore substantial additional losses without any prior knowledge.
A legal scholar pointed out that the valuation method is core price-sensitive information affecting the NAV. Any changes must be disclosed promptly and fully. In this incident, investors were completely unaware of the rule change while trading, potentially violating principles of fair and timely disclosure and harming market integrity.
Amid volatility risks in the precious metals market, major commercial banks had previously repeatedly strengthened risk controls. Institutions like ICBC and ABC had issued risk warnings for precious metal investments. For accumulated metal products, several large state-owned banks had implemented a dual control pattern involving higher risk ratings and increased minimum investment amounts.
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