Analysis of Sustainability of High Premium Arbitrage and Risk of Extreme Premium Pullback for Silver LOF Fund

• Arbitrage Process and Mechanism
  : LOF products have the dual-track feature of “off-exchange subscription at net value, on-exchange trading at market price”. When the on-exchange trading price is significantly higher than the fund’s net asset value, investors can subscribe off-exchange at net value, confirm on T+1, and sell on-exchange on T+2. The arbitrage profit is the spread minus subscription fees and transaction commissions (theoretical profit ≈ premium rate - fee costs). This process itself has T+2 time lag and liquidity risks [1][2].
• Recent Extreme Premiums and Price Volatility
  : Public reports show that the fund has issued multiple risk warnings and temporary trading halts since December, with the premium rate once approaching a high of about 68% in late December;随后出现连续三个交易日的涨停，在复牌后直封跌停，单日振幅显著，场内价格从高位回落、溢价率同步大幅收窄（报道提及跌停时溢价率仍处于约45%的较高水平）[1][2].
• Supply Constraints and Capital Inflows
  : To control scale and tracking error, the fund company has adjusted the subscription limits for Class A/Class C shares multiple times, and implemented intraday temporary trading halts and risk warnings during specific windows. Despite continuous measures like purchase restrictions, regulatory prompts, and trading halts to cool down the market, on-exchange turnover and capital inflows once surged, indicating high speculative and arbitrage sentiment [1][2].

• Product Scarcity
  : This fund is a major LOF target investing in silver futures in the current market, becoming an important channel for on-exchange funds to deploy during the rising silver market [1].
• Market Trend and Sentiment Resonance
  : International and domestic silver prices have risen significantly this year, combined with multiple narratives such as low inventory, industrial demand, and safe-haven sentiment, driving market trading sentiment and capital pursuit [1][2].
• Subscription Constraints and Liquidity Mismatch
  : Off-exchange subscription limits have been tightened multiple times, restricting channels for “subscription at net value”, leading a large amount of capital to shift to on-exchange buying, thus pushing up on-exchange prices and premium rates. Meanwhile, LOF subscription/redemption is in cash mode with T+2 time lag, making the arbitrage mechanism lag and fail to suppress spreads immediately [1][2].

• Clear Tone of “Unsustainability”
  : The fund company has repeatedly emphasized in series of announcements and risk warnings that “the high premium rate in the secondary market is not sustainable”, and has implemented multiple trading halts and adjusted subscription limits to cool down, releasing strong correction signals from regulatory and institutional levels [1][2].
• Arbitrage Mechanism Effective but Lagging
  : Theoretically, arbitrageurs can profit through “off-exchange subscription + on-exchange selling”. However, the T+2 time window means:

1. If silver prices decline during this period leading to net value pullback, or market sentiment cools leading to rapid convergence of premium rates, arbitrage profits may shrink significantly or even turn into losses;
2. Concentrated arrival of arbitrage funds may trigger concentrated selling pressure, leading to extreme situations like stampede and liquidity exhaustion, such as inability to sell at limit down [1][2].

• Supply-side Adjustments Marginally Converge Premiums
  : The fund company’s dynamic adjustment of subscription limits (e.g., from extremely strict restrictions to phased relaxation then re-tightening) aims to suppress premiums through supply regulation. Public reports show that after multiple trading halts and risk warnings, the premium rate has fallen significantly from the previous high (but still remains at a relatively high level like about 45%) [1][2].
• Reference from Historical Experience
  : In past cases of crude oil-related LOF products, there have been instances of extreme premiums followed by rapid regression and剧烈波动, indicating that the convergence risk of this round of high premiums is not isolated. Although specific values are not expanded due to tool limitations, the structural characteristics are similar (overheated sentiment - supply constraints - price correction) [1].

• Superimposed Dual Price Risks
  :

1. Premium Regression Risk
   : On-exchange trading prices will eventually return to net value; the high premium part is “sentiment premium”, and once reversed, the higher the premium bought, the larger the pullback幅度;
2. Underlying Asset Volatility Risk
   : Silver prices themselves are affected by multiple factors such as macroeconomics, inventory, and industrial demand; if a correction occurs, net value will also decline accordingly [1][2].

• Liquidity Exhaustion Like “One-word Limit Down”
  : Under multiple pressures like sudden sentiment changes, concentrated arrival of arbitrage funds, and regulatory warnings, on-exchange markets may experience situations like sealed limit down and sharp shrinkage of trading volume, making high-position buyers unable to stop losses in time [1][2].
• Time Lag and Information Asymmetry
  : For follow-up investors who do not fully understand the T+2 mechanism and LOF trading details, there is significant uncertainty during the subscription-to-selling period, which easily leads to cognitive biases like “overestimating profits and underestimating volatility” [1][2].
• Continuous Warnings from Regulatory and Institutional Sides
  : Continuous risk warnings and trading halt measures from exchanges, fund companies, and media have strengthened the market consensus of “high premium equals high risk”, and the speed of sentiment retreat may be faster than expected, accelerating premium convergence [1][2].

• Strict Circle of Competence and Capital Discipline
  : Ordinary investors who do not have in-depth understanding of LOF mechanisms, futures markets, and liquidity are advised to be cautious or even avoid such games. Participation should use small amounts of idle funds for trial, preset stop-loss/exit plans, and avoid heavy positions or leveraged participation [1][2].
• Focus on Costs and Time Windows
  : When calculating arbitrage profits, subscription fees, transaction commissions, and slippage costs should be included, and the probability of net value and market sentiment fluctuations during the T+2 period should be evaluated; after the premium rate has narrowed significantly, theoretical profits compress rapidly, and the risk-reward ratio tends to be unfavorable [1][2].
• Closely Track Policies and Announcements
  : Adjustments to subscription limits by fund companies, intraday temporary trading halts, risk warning announcements, and exchange surveillance measures for abnormal trading may significantly affect liquidity supply and market sentiment, requiring dynamic tracking [1][2].
• Beware of Stampede and Herd Effect
  : At nodes of concentrated arbitrage maturity or sentiment reversal, concentrated emergence of selling orders may amplify volatility; sufficient liquidity buffers and execution strategies should be reserved to avoid losing bargaining power in extreme volatility [1][2].

• Weak Sustainability
  : This round of high premiums for Silver LOF is mainly caused by the resonance of multiple factors such as scarcity, market trend and sentiment overlap, and subscription constraints. Against the background of strong cooling from regulatory and institutional sides, lagging but eventually effective arbitrage mechanisms, and volatile market sentiment, high premiums are difficult to maintain for a long time. Historical experience and public reports both point to the risks of premium convergence and increased volatility [1][2].
• Significant Risks of Chasing High
  : During the extreme premium pullback phase, high-position buyers will face double blows of “premium regression + underlying asset volatility”, and may encounter liquidity dilemmas like “one-word limit down” in extreme cases. For ordinary investors, such games seem like “arbitrage” but are actually high-risk speculation; strict adherence to circle of competence and risk discipline is essential [1][2].

[1] Time Finance via Sina Finance/NetEase/Oriental Fortune etc. — “SDIC Silver LOF Premium Rate Exceeds 61%! Someone Earned 350 Yuan from 500 Yuan Arbitrage in Two Days” (Series Reports)
Links:
https://finance.sina.com.cn/roll/2025-12-24/doc-inhcxqhx5530853.shtml
https://www.163.com/dy/article/KHJ33UEU0530KP1K.html
https://wap.eastmoney.com/a/202512243601040821.html

[2] 21st Century Business Herald/21 Finance — “Premium Still Over 45%! 16 Risk Warnings ‘Force Halt’ SDIC Silver LOF”
Links:
https://www.21jingji.com/article/20251225/herald/c8980e2ae3ef4066a95dcc5f3be991aa.html
https://finance.sina.com.cn/roll/2025-12-25/doc-inhcywam9003616.shtml
https://www.21jingji.com/article/20251225/herald/0a3f32fb71340bd7bc4624c401b423a7.html

[3] Kaihu51/Caifuhao etc. — “LOF Arbitrage Operation and Limit Adjustment Tracking”
Links:
https://kaihu51.com/arbitrage/1463
https://caifuhao.eastmoney.com/news/20251226144449810025760

(The above links and content are from public reports, cited with [1][2][3] in-text.)