by Lori Pizzani
structuredretailproducts.com
A US wealth manager has said it is buying shorter dated equity-linked notes with capital protection for its clients as volatile conditions persist.
Frederick S Wright IV, chief investment officer of Smith & Howard Wealth Management told SRP he favors structured notes with performance linked to the S&P 500 (as a way of hedging against large cap stocks) and the Russell 2000 (to hedge against small cap stocks).
“We use them as equity replacements,” he said. He also likes those linked to the MSCI EAFE as stand-ins for international equities. Wright said his firm has used structured notes since late 2006/early 2007.
What he finds most appealing are notes with short maturities of two years or less.
The firm’s primary use for structured products is to reduce downside risk. “Most important to us is principal protection or partial protection, more so than a leveraged upside,” he said. “We look at it as a risk reduction tool versus enhanced return notes.”
While Wright says he has reviewed some structured notes linked to oil and global infrastructure indices, “there is nothing well priced [at present].” What he would like to see is a principal protected oil note that can provide positive returns whether oil prices rise or fall within a 30% to 35% range.
Smith & Howard usually works on a discretionary basis with clients, investing without specific security approval, but due to the relative novelty of structured products on the US market, Wright believes in discussing them with clients prior to purchasing.
Structured notes that provide returns even in down markets do not always get a strong reception, he said: “You’d think they would be attractive now. But clients’ credit concerns have eclipsed the potential benefits.
“I actually find it more difficult now because they are being issued by the banks with credit crisis [involvement],” he said. One question he repeatedly hears is: where do structured products fall in terms of the order of debt obligations of the issuer? “It’s a concern I’m hearing from clients and I don’t see this addressed in the product literature,” he said.
For a trial subscription to StructuredRetailProducts.com, click here.
SPA-2008
Saturday, August 30, 2008
Friday, August 29, 2008
Research Magazine: Q & A with the SPA
By DAVID MACCHIA, WEALTH2K
ResearchMag.com
Last year structured products sales in the U.S. increased to $117 billion. And while most sales of structured products have occurred in the institutional and high-net-worth markets, the movement of structured products into the retail marketplace is clearly underway. What are the implications for competing products? According to Boston University Professor, Zvi Bodie, “The total amount of wealth that will be converted to structured products is in the trillions of dollars.”
The potential impact on other industries from the rise of structured products is one that the Structured Products Association, tackles in this interview. It’s not hard to imagine that the impact of structured products could be significant given the potent appeal of principal protection combined with investment growth potential.
----
DAVID MACCHIA (davidmacchia.com): I'm most interested in exploring the whole issue of structured products, the industry and the SPA's role in it. And I'd like to start with sort of a foundational question, if I could. Which is, given the fact that in the financial services world, apart from the sector that deals with structured products regularly, I think there’s a lot of wonder and mystery about what structured products really are? Could you start at the beginning and define what structured products are?
SPA: David, it’s a privilege to be speaking with you today. Structured products are fundamentally a variation on a direct investment in a particular asset class. Equities, fixed income, commodities -- any type of traditional asset class can be the basis of a structured product. For example, a structured note linked to the S&P 500 might provide two times the upside up to a cap, or protection of your principal 100%, or the first 15% of the downside risk in the investment. Structured products may be described as enhanced ETFs – similar index exposure, but with a desirable benefit to the payoff profile that the investor values enough to pay for.
MACCHIA: The notion of delivering equity-linked returns combined with a principal protection is a concept that's I’ve written about a lot. Among others the Retirement Income Industry Association has certainly identified what we refer to as the transition management phase. Let's describe that as the period beginning roughly 10 years before retirement and continuing until 10 years after retirement. It’s becoming well understood that investment losses during this period will, at the very least, diminish for life the amount of retirement income that can be generated. Or, depending on when the investment loss occurs, potentially lead to portfolio ruin. So when I think about the benefits that structured products can provide, I become pretty excited because you can see a role for them in the lives of potentially millions of boomer clients. So what I'm describing here is the context for the migration of structured products to the retail market. Is this something that the industry is focused on? Is it a high priority? How would you describe the urgency, if there is one, to enter that marketplace?
SPA: Our belief is that we’re at the ascendancy of structured products as the pre-eminent vehicle for the massive pool of boomer retirement wealth. Interestingly enough, the U.S. lags behind the rest of the world – Europe, Asia, Australia, South America and the rest of North America for that matter -- is far behind the rest of the world in terms of principal protected exposure with guaranteed income. For Europeans, principal protected structured products are the equivalent of mutual funds to American investors. Europeans, by and large, value capital preservation over picking stocks and going for outsized returns. Americans have a different investment mentality. We believe that you can “asset allocate” risk out of your portfolio through diversification. Unfortunately, we have found that the fixed income and equities markets have a tendency to move in lockstep. The dot-com market break in 2000 proved how fallible that theory could be.
When indexes take 30, 40 and 50% hits and interest rates are so low that you get only 1 or 2% of return on your investment for a year without taking exceptional credit risk, structured products are simply the superior investment vehicle. You can repair your portfolio by selling call options in an automated structure, by purchasing high-yielding reverse convertibles.
The top 5 or 10 percent of cutting-edge investment advisors have embraced the structured products investment class and consider it to be the secret weapon that sets them apart from their competitors.
On the subject of principal protected notes, they would be a core holding in investor portfolios. But in the U.S. , there’s something of a tax disadvantage if they are held outside of retirement accounts. The Structured Products Association has engaged Congress and the Treasury on revisiting this adverse tax treatment, but in the meantime, they are optimal investments for tax-free retirement accounts.
Certain structured products that with a ten year horizon, if managed the right way, can give you more than 100% exposure to the S&P 500. It can give you more than 100% principal protection. In fact, it'll pay you a coupon of up to 1 or 2% per year at a minimum and give you full leveraged exposure to the S&P 500. As a core holding in your retirement account, it’s a very powerful value proposition for those who have that time horizon in their retirement accounts.
MACCHIA: What you're describing in terms of economic benefit seems obvious and important. And of course, John Bogle would think that investing in the S&P 500 is exciting. But what occurs to me is that because, for instance, you may think in terms of a ten-year timeframe for these products, with limited liquidity-- I'd like to come back to the liquidity issue later-- then having them in a strategic asset allocation within a retirement account framework seems to make a lot of sense. Do you agree?
SPA: David, that’s absolutely right. Advisors who haven’t made the effort to understand the new technology have inaccurately stated that structured products are “gimmicks” with “high fees.” Such thinking is a disservice to their clients and their fiduciary responsibilities to provide the client with the best possible investment allocation. To disregard structured products is potentially a disservice to the client. To be clear, not all portfolios call for structured investments, but the advisor should arrive at that decision only after a careful assessment of her client’s needs.
MACCHIA: If you accept the notion that accumulation planning is inherently different than income- generation planning, then you have to say that the majority of financial advisors in the U.S. remain in the accumulation mode mindset.
SPA: Agreed. You could say that Modern Portfolio Theory is no longer so modern, and that structured products represent the next wave of MPT.
MACCHIA: This implies, to me at least, that maybe the largest challenge the structured products industry faces is a communications challenge, in terms of recasting people's thinking about these products. Educating advisors and investors about their use in proper income distribution planning, and getting people to focus on critical benefits that they currently they don't see. Do you agree that communications is a huge issue for the structured products industry?
SPA: It's our number one priority as an industry. And I think you touched upon a very important point – it’s not simply education of the brokers and advisors on the utility of structured investments, it's more about winning over hearts and minds. I’m going to be a bit controversial here: a good number of brokers and advisors have been intellectually lazy about learning about the investment class and have resorted to denigrating the investment class to the clients by saying, "Oh, it's too high fee, too high risk, too complicated for you. So I’m going to do you a favor and steer you away from that.”
Some advisors sell their own portfolio management skills by selling against structured investments. As an industry, we have our work cut out for us. And I spend a lot of time with the chief investment officers of the major wealth management firms advocating for this investment class, telling CIOs they should have structured products available to their top producers. So it's a top-to-bottom/bottom-to-top education challenge before us.
For the full interview in Research Magazine, click here.
ResearchMag.com
Last year structured products sales in the U.S. increased to $117 billion. And while most sales of structured products have occurred in the institutional and high-net-worth markets, the movement of structured products into the retail marketplace is clearly underway. What are the implications for competing products? According to Boston University Professor, Zvi Bodie, “The total amount of wealth that will be converted to structured products is in the trillions of dollars.”
The potential impact on other industries from the rise of structured products is one that the Structured Products Association, tackles in this interview. It’s not hard to imagine that the impact of structured products could be significant given the potent appeal of principal protection combined with investment growth potential.
----
DAVID MACCHIA (davidmacchia.com): I'm most interested in exploring the whole issue of structured products, the industry and the SPA's role in it. And I'd like to start with sort of a foundational question, if I could. Which is, given the fact that in the financial services world, apart from the sector that deals with structured products regularly, I think there’s a lot of wonder and mystery about what structured products really are? Could you start at the beginning and define what structured products are?
SPA: David, it’s a privilege to be speaking with you today. Structured products are fundamentally a variation on a direct investment in a particular asset class. Equities, fixed income, commodities -- any type of traditional asset class can be the basis of a structured product. For example, a structured note linked to the S&P 500 might provide two times the upside up to a cap, or protection of your principal 100%, or the first 15% of the downside risk in the investment. Structured products may be described as enhanced ETFs – similar index exposure, but with a desirable benefit to the payoff profile that the investor values enough to pay for.
MACCHIA: The notion of delivering equity-linked returns combined with a principal protection is a concept that's I’ve written about a lot. Among others the Retirement Income Industry Association has certainly identified what we refer to as the transition management phase. Let's describe that as the period beginning roughly 10 years before retirement and continuing until 10 years after retirement. It’s becoming well understood that investment losses during this period will, at the very least, diminish for life the amount of retirement income that can be generated. Or, depending on when the investment loss occurs, potentially lead to portfolio ruin. So when I think about the benefits that structured products can provide, I become pretty excited because you can see a role for them in the lives of potentially millions of boomer clients. So what I'm describing here is the context for the migration of structured products to the retail market. Is this something that the industry is focused on? Is it a high priority? How would you describe the urgency, if there is one, to enter that marketplace?
SPA: Our belief is that we’re at the ascendancy of structured products as the pre-eminent vehicle for the massive pool of boomer retirement wealth. Interestingly enough, the U.S. lags behind the rest of the world – Europe, Asia, Australia, South America and the rest of North America for that matter -- is far behind the rest of the world in terms of principal protected exposure with guaranteed income. For Europeans, principal protected structured products are the equivalent of mutual funds to American investors. Europeans, by and large, value capital preservation over picking stocks and going for outsized returns. Americans have a different investment mentality. We believe that you can “asset allocate” risk out of your portfolio through diversification. Unfortunately, we have found that the fixed income and equities markets have a tendency to move in lockstep. The dot-com market break in 2000 proved how fallible that theory could be.
When indexes take 30, 40 and 50% hits and interest rates are so low that you get only 1 or 2% of return on your investment for a year without taking exceptional credit risk, structured products are simply the superior investment vehicle. You can repair your portfolio by selling call options in an automated structure, by purchasing high-yielding reverse convertibles.
The top 5 or 10 percent of cutting-edge investment advisors have embraced the structured products investment class and consider it to be the secret weapon that sets them apart from their competitors.
On the subject of principal protected notes, they would be a core holding in investor portfolios. But in the U.S. , there’s something of a tax disadvantage if they are held outside of retirement accounts. The Structured Products Association has engaged Congress and the Treasury on revisiting this adverse tax treatment, but in the meantime, they are optimal investments for tax-free retirement accounts.
Certain structured products that with a ten year horizon, if managed the right way, can give you more than 100% exposure to the S&P 500. It can give you more than 100% principal protection. In fact, it'll pay you a coupon of up to 1 or 2% per year at a minimum and give you full leveraged exposure to the S&P 500. As a core holding in your retirement account, it’s a very powerful value proposition for those who have that time horizon in their retirement accounts.
MACCHIA: What you're describing in terms of economic benefit seems obvious and important. And of course, John Bogle would think that investing in the S&P 500 is exciting. But what occurs to me is that because, for instance, you may think in terms of a ten-year timeframe for these products, with limited liquidity-- I'd like to come back to the liquidity issue later-- then having them in a strategic asset allocation within a retirement account framework seems to make a lot of sense. Do you agree?
SPA: David, that’s absolutely right. Advisors who haven’t made the effort to understand the new technology have inaccurately stated that structured products are “gimmicks” with “high fees.” Such thinking is a disservice to their clients and their fiduciary responsibilities to provide the client with the best possible investment allocation. To disregard structured products is potentially a disservice to the client. To be clear, not all portfolios call for structured investments, but the advisor should arrive at that decision only after a careful assessment of her client’s needs.
MACCHIA: If you accept the notion that accumulation planning is inherently different than income- generation planning, then you have to say that the majority of financial advisors in the U.S. remain in the accumulation mode mindset.
SPA: Agreed. You could say that Modern Portfolio Theory is no longer so modern, and that structured products represent the next wave of MPT.
MACCHIA: This implies, to me at least, that maybe the largest challenge the structured products industry faces is a communications challenge, in terms of recasting people's thinking about these products. Educating advisors and investors about their use in proper income distribution planning, and getting people to focus on critical benefits that they currently they don't see. Do you agree that communications is a huge issue for the structured products industry?
SPA: It's our number one priority as an industry. And I think you touched upon a very important point – it’s not simply education of the brokers and advisors on the utility of structured investments, it's more about winning over hearts and minds. I’m going to be a bit controversial here: a good number of brokers and advisors have been intellectually lazy about learning about the investment class and have resorted to denigrating the investment class to the clients by saying, "Oh, it's too high fee, too high risk, too complicated for you. So I’m going to do you a favor and steer you away from that.”
Some advisors sell their own portfolio management skills by selling against structured investments. As an industry, we have our work cut out for us. And I spend a lot of time with the chief investment officers of the major wealth management firms advocating for this investment class, telling CIOs they should have structured products available to their top producers. So it's a top-to-bottom/bottom-to-top education challenge before us.
For the full interview in Research Magazine, click here.
Thursday, August 28, 2008
SPA MarketColor: Recent Headlines - September 2008
STRATEGIES AND INVESTMENTS:
· Business Week: Absolute Return Notes Rule As Bear Mkt Scares Off Optimists
· Credit Suisse on Using Hedge Fund Structured Products to Raise Capital
· IndexUniverse.com: Deutsche Bank's New ETNs Replicate Graham Strategies
· Wall Street Journal's FAQs on ETNs - What You Need to Know
· Happy Birthday, iPath ETNs (seekingalpha.com)
· Reg. Rep: Structured Products - Bright Future for Securitization?
· Financial Times: Downside protection gains popularity
MARKETS AND DISTRIBUTION:
· Bonds.com to Distribute Structured Products
· Derivatives Week: Ex-Countrywide Structured Pros Seek New Home
· DWS Scudder Doubles S-Notes Sales to $600 Million (Investment News)
· Financial Times: In the US, Structured Products Flying Into Harsher Climate
· Financial Times: High Structured Products Inflows Show US Playing Catch-Up
· Bloomberg: Bridgewater predicts $1.6 trillion in subprime losses
INTERNATIONAL:
· India: Structured Products 'Pick Up' In Tough Market
· India: Equity SPs - Best of both worlds (Business Times)
· China: Overseas Banks Grab Bigger Share of China's SP Market
· UK: 88% of Advisors Recommend SPs Over the Next 12 Months
· UK: Wealth advisers and private banks turn to structured products
· Australia: Choosing products that are structurally sound
REGULATORY:
· SPA Asks SEC to Distinguish Structured Products from Asset-Backed Securities
· NYSE Releases Informed Investor Guide to ETNs
· Lawyer: The Hapless Members of Citi’s ELKS Club (Seeking Alpha)
· Final Version of Structured Products Principles For Individual Investors Released
::: Get instant SPA News in a Feedburner reader.
::: The SPA is sponsoring two new groups on LinkedIn.::: To join the Structured Products Association group, click here. ::: To join the SPA's Structured Products and Investments group, click here.
· Business Week: Absolute Return Notes Rule As Bear Mkt Scares Off Optimists
· Credit Suisse on Using Hedge Fund Structured Products to Raise Capital
· IndexUniverse.com: Deutsche Bank's New ETNs Replicate Graham Strategies
· Wall Street Journal's FAQs on ETNs - What You Need to Know
· Happy Birthday, iPath ETNs (seekingalpha.com)
· Reg. Rep: Structured Products - Bright Future for Securitization?
· Financial Times: Downside protection gains popularity
MARKETS AND DISTRIBUTION:
· Bonds.com to Distribute Structured Products
· Derivatives Week: Ex-Countrywide Structured Pros Seek New Home
· DWS Scudder Doubles S-Notes Sales to $600 Million (Investment News)
· Financial Times: In the US, Structured Products Flying Into Harsher Climate
· Financial Times: High Structured Products Inflows Show US Playing Catch-Up
· Bloomberg: Bridgewater predicts $1.6 trillion in subprime losses
INTERNATIONAL:
· India: Structured Products 'Pick Up' In Tough Market
· India: Equity SPs - Best of both worlds (Business Times)
· China: Overseas Banks Grab Bigger Share of China's SP Market
· UK: 88% of Advisors Recommend SPs Over the Next 12 Months
· UK: Wealth advisers and private banks turn to structured products
· Australia: Choosing products that are structurally sound
REGULATORY:
· SPA Asks SEC to Distinguish Structured Products from Asset-Backed Securities
· NYSE Releases Informed Investor Guide to ETNs
· Lawyer: The Hapless Members of Citi’s ELKS Club (Seeking Alpha)
· Final Version of Structured Products Principles For Individual Investors Released
::: Get instant SPA News in a Feedburner reader.
::: The SPA is sponsoring two new groups on LinkedIn.::: To join the Structured Products Association group, click here. ::: To join the SPA's Structured Products and Investments group, click here.
Tuesday, August 26, 2008
UK: 88% of Advisors Recommend SPs Over the Next 12 Months
by Nick Rice
FT Advisor
IFAs have said they will increase their allocation to structured products more than to any other mainstream asset class over the next year, according to Keydata Investment Services.
A Keydata telephone poll of 50 advisers this month revealed 88.1 per cent would recommend that clients put more money in structured products over the next 12 months. Just 2.4 per cent of advisers would recommend clients maintain their current weighting and 7.1 per cent would tell clients to decrease it.
Other defensive asset classes will receive lower boosts. Cash was the most heavily favoured after structured products, with 83.3 per cent of advisers recommending clients increase their exposure, 9.5 per cent saying they should maintain it and 2.4 per cent suggesting they decrease it.
Fixed income received a higher recommendation than pure corporate bonds. Sixty-nine per cent said they would advise clients to increase their weighting to fixed income against 38.1 per cent for corporate bonds.
Cautious Managed funds, which have seen high inflows over the last year, would see allocation increases from 66.7 per cent of IFAs, less than fixed income as a whole. UK equities, international equities and property were at the bottom of the recommendation list at 16.7 per cent, 14.3 per cent and 4.8 per cent, respectively.
Mark Owen, director of sales and strategy at Keydata, said he had anticipated a large move into fixed income and cash, but was surprised at the allocation to structured products, although Keydata itself is a structured-product provider.
He said the move indicated a greater awareness of structured products among advisers, particularly in terms of their return profiles and objectives.
For the full article from FTAdvisor.com, click here.
FT Advisor
IFAs have said they will increase their allocation to structured products more than to any other mainstream asset class over the next year, according to Keydata Investment Services.
A Keydata telephone poll of 50 advisers this month revealed 88.1 per cent would recommend that clients put more money in structured products over the next 12 months. Just 2.4 per cent of advisers would recommend clients maintain their current weighting and 7.1 per cent would tell clients to decrease it.
Other defensive asset classes will receive lower boosts. Cash was the most heavily favoured after structured products, with 83.3 per cent of advisers recommending clients increase their exposure, 9.5 per cent saying they should maintain it and 2.4 per cent suggesting they decrease it.
Fixed income received a higher recommendation than pure corporate bonds. Sixty-nine per cent said they would advise clients to increase their weighting to fixed income against 38.1 per cent for corporate bonds.
Cautious Managed funds, which have seen high inflows over the last year, would see allocation increases from 66.7 per cent of IFAs, less than fixed income as a whole. UK equities, international equities and property were at the bottom of the recommendation list at 16.7 per cent, 14.3 per cent and 4.8 per cent, respectively.
Mark Owen, director of sales and strategy at Keydata, said he had anticipated a large move into fixed income and cash, but was surprised at the allocation to structured products, although Keydata itself is a structured-product provider.
He said the move indicated a greater awareness of structured products among advisers, particularly in terms of their return profiles and objectives.
For the full article from FTAdvisor.com, click here.
Tuesday, August 19, 2008
NYSE Regulation: ETNs and the Informed Investor
An Exchange Traded Note (ETN) is a relatively new type of investment vehicle that is unfamiliar to many investors. Before you decide to invest, there are some basic questions which you should consider in order to make an informed investment decision.
What Is An Exchange-Traded Note? An Exchange Traded Note (ETN) is a common name for a senior unsecured debt obligation designed to track the total return of an underlying market index or other benchmark, minus investor fees. The creditworthiness of an ETN is itself not rated, but instead is based on the creditworthiness of the issuer.
Thus, the issuer’s credit rating is an important consideration for ETN investors. Typically, ETNs have a repurchase feature, providing qualified investors the election to redeem notes of at least a specified minimum denomination or value with the issuer on a daily or weekly basis at a predetermined price. The details of this feature are in the ETN prospectus. Individual investors, not qualified for redemption election, can purchase or sell their ETNs in the secondary market, sell at a specified issuer call event, or allow them to mature.
ETNs can offer investment exposure to market sectors and asset classes that may be difficult to achieve in a cost-effective way with other types of investments. ETNs can also act as an effective hedging tool.
An ETN allows individual investors to buy an obligation, similar to a forward contract, which is traded on an Exchange. ETNs may be linked to a wide variety of assets. Today there are many types of ETNs linked to indexes and/or single reference assets based on a variety of products such as commodity futures (e.g., energy, grains, industrial metals, livestock, and petroleum), foreign currencies (e.g., Euro, yen), and equities (grouped by such categories as industry sector, strategy or geographic location).
For the entire NYSE Informed Investor educational piece, click here.
What Is An Exchange-Traded Note? An Exchange Traded Note (ETN) is a common name for a senior unsecured debt obligation designed to track the total return of an underlying market index or other benchmark, minus investor fees. The creditworthiness of an ETN is itself not rated, but instead is based on the creditworthiness of the issuer.
Thus, the issuer’s credit rating is an important consideration for ETN investors. Typically, ETNs have a repurchase feature, providing qualified investors the election to redeem notes of at least a specified minimum denomination or value with the issuer on a daily or weekly basis at a predetermined price. The details of this feature are in the ETN prospectus. Individual investors, not qualified for redemption election, can purchase or sell their ETNs in the secondary market, sell at a specified issuer call event, or allow them to mature.
ETNs can offer investment exposure to market sectors and asset classes that may be difficult to achieve in a cost-effective way with other types of investments. ETNs can also act as an effective hedging tool.
An ETN allows individual investors to buy an obligation, similar to a forward contract, which is traded on an Exchange. ETNs may be linked to a wide variety of assets. Today there are many types of ETNs linked to indexes and/or single reference assets based on a variety of products such as commodity futures (e.g., energy, grains, industrial metals, livestock, and petroleum), foreign currencies (e.g., Euro, yen), and equities (grouped by such categories as industry sector, strategy or geographic location).
For the entire NYSE Informed Investor educational piece, click here.
Credit Suisse: Cap-Raising with Fund Linked PPNs (FINalternatives.com)
By Steven Krawciw and Irene Aldridge
Prime brokerages and their partner private banks provide hedge fund managers with services ranging from execution to capital introductions to lending. One of the areas least utilized by hedge fund managers, however, is a banks’ structuring capability.
The main advantage of structured products is that it allows a fund manager to raise capital from a vast pool of untapped investors. In addition, the bank performs due diligence and finds an appropriate way to package the product, acts as a clearinghouse of the product, and potentially assumes credit liability at maturity of the product. With the number of wealthy retail investors rising worldwide, we are likely to see an increasing number of structuring deals that may benefit hedge fund managers.
“Structuring” refers to the process of creating, packaging and distributing structured products.
“Structured products” is a moniker for a vast array of hybrid, or financially-engineered, products that banks distribute through their networks of financial advisers to their clients. Private clients consider structured products as a credible and affordable way to access a fund, perhaps with principal protection. These retail distribution capabilities comprise an important value-added service by banks that hedge fund managers may not be fully utilizing.
Structured products are typically sold “over the counter” (OTC), which means that unlike their exchange-traded cousins—Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs)—structured products are private placements. Still, the Securities and Exchange Commission oversees the distribution of structured products, and one needs to have all the proper SEC registrations in order to sell these securities. Another value add by the prime broker is that the broker’s licenses cover a fund’s product and spare the manager having to register with the SEC.
Unlike ETFs, structured products are typically underwritten by a bank. During the underwriting process, the bank performs due diligence analysis, structures the product, and often assumes the counterparty risk. It is also possible for a bank to securitize obligations outstanding on structured products. Whether securitized or not, underwriting of the structured product backed by a fund is the third benefit a bank delivers a fund manager through structuring.
The “structured” part in “structured products” refers to bundling the underlying exposure to a fund with various financial instruments. A typical goal of structuring is to create a product with a custom payout that is appealing to retail investors with a specific risk appetite. For example, a class of structured products known as Principal-Protected Notes (PPNs) provide the retail investor with either a portion of the payout, say, from a fund if it meet its targets. If the fund does not meet its performance targets, then the retail investor holding a PPN will receive his principal back along with the pre-agreed interest rate on that principal. With such a PPN, the retail investor gains exposure to a fund, but is protected from any downside.
So how does the actual structuring work?
For the complete article on FINalternatives.com, click here.
Prime brokerages and their partner private banks provide hedge fund managers with services ranging from execution to capital introductions to lending. One of the areas least utilized by hedge fund managers, however, is a banks’ structuring capability.
The main advantage of structured products is that it allows a fund manager to raise capital from a vast pool of untapped investors. In addition, the bank performs due diligence and finds an appropriate way to package the product, acts as a clearinghouse of the product, and potentially assumes credit liability at maturity of the product. With the number of wealthy retail investors rising worldwide, we are likely to see an increasing number of structuring deals that may benefit hedge fund managers.
“Structuring” refers to the process of creating, packaging and distributing structured products.
“Structured products” is a moniker for a vast array of hybrid, or financially-engineered, products that banks distribute through their networks of financial advisers to their clients. Private clients consider structured products as a credible and affordable way to access a fund, perhaps with principal protection. These retail distribution capabilities comprise an important value-added service by banks that hedge fund managers may not be fully utilizing.
Structured products are typically sold “over the counter” (OTC), which means that unlike their exchange-traded cousins—Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs)—structured products are private placements. Still, the Securities and Exchange Commission oversees the distribution of structured products, and one needs to have all the proper SEC registrations in order to sell these securities. Another value add by the prime broker is that the broker’s licenses cover a fund’s product and spare the manager having to register with the SEC.
Unlike ETFs, structured products are typically underwritten by a bank. During the underwriting process, the bank performs due diligence analysis, structures the product, and often assumes the counterparty risk. It is also possible for a bank to securitize obligations outstanding on structured products. Whether securitized or not, underwriting of the structured product backed by a fund is the third benefit a bank delivers a fund manager through structuring.
The “structured” part in “structured products” refers to bundling the underlying exposure to a fund with various financial instruments. A typical goal of structuring is to create a product with a custom payout that is appealing to retail investors with a specific risk appetite. For example, a class of structured products known as Principal-Protected Notes (PPNs) provide the retail investor with either a portion of the payout, say, from a fund if it meet its targets. If the fund does not meet its performance targets, then the retail investor holding a PPN will receive his principal back along with the pre-agreed interest rate on that principal. With such a PPN, the retail investor gains exposure to a fund, but is protected from any downside.
So how does the actual structuring work?
For the complete article on FINalternatives.com, click here.
Saturday, August 16, 2008
India: Structured Products 'Pick Up' In Tough Market (Economic Times)
Interview with Pradeep Dokania, MD & Head, Global Private Client, Merrill Lynch
With the stock markets showing heightened volatility, high net worth investors are looking at ways of fortifying their portfolio. Pradeep Dokania, managing director and head of Global Private Client at DSP Merrill Lynch.
How has the volatility in the stock markets impacted the investment decisions of the wealthy? Is there a loss of confidence in equities as an asset class?
Well, it would be unfair to say that equities are losing their sheen because of the market correction. In some ways this correction was very much due.
If you look at the case of the Chinese stock markets, it went up to an all time high in January this year, but has corrected about 50% already. The Indian stock market has corrected about 40% in the same time. This just goes to show that globalisation has linked all of us together; no one is insulated. Typically, our clients would have a balanced portfolio, with about 55% of their money in equity and the remainder in debt. With the correction in the markets, we would have seen a 5-10% change in the portfolio.
What are the new products that high net worth investors are looking at to invest in?
Structured products have picked up quite significantly with more investors gaining comfort with them. Structured products allow clients to take a view on an underlying (indices, stocks, interest rates, etc.,) asset class depending on their risk appetite. So if a client has a positive view of a particular asset class from a 1-2 year horizon but doesn’t want to directly take exposure, he can do so via a structured product. These are mostly capital guaranteed and fortify an investor’s portfolio to a large extent.
Other products like gold funds and gold exchange traded funds are also becoming popular. Offshore investments are a huge area where we see growth and Merrill Lynch has the most comprehensive global platform to offer these to our clients. In markets like the United States leverage products are a huge business, but they are high-risk products and are not very popular here.
What are the offshore investments options available to investors today?
Global products available to Indian investors include hedge funds, global mutual funds, private equity, commodities and real estate. The option to invest directly in equities in different markets is also available. For instance, two years ago a lot of investors put their money in eastern Europe. Products like alternative energy funds, mineral funds, water funds, gold funds and BRIC funds were pretty popular. More recently, markets like Brazil have done well and it makes sense to invest there.
Even in the US, certain stocks have done pretty well. Prime examples include stocks like Apple Computer and Nintendo.
In ideal circumstances, how much of an investor’s portfolio should be diversified into offshore investments? What are the tax implications?
In ideal circumstances, 15% of an investor’s portfolio should be diversified into offshore products and the rest in domestic investments. At the moment, maybe only 1% of an investor’s portfolio would be exposed to overseas investments. It is also important to remember that people are just beginning to experiment with global products because they have very little exposure or experience of investing abroad. There is no additional tax burden of investing overseas. A high net worth individual would pay at his marginal tax rate, 33% in most cases.
What is the impact of exchange rate fluctuations for an investor looking at putting his money overseas?
Well it’s not that big a deal really. I mean for someone who is wary of putting his money in the dollar, we can give them the option of investing in the euro. Private bankers overseas say that India doesn’t have the product suite to offer to clients. Is that true? Well there is no doubt that in certain developed markets the product basket is quite wide. For instance, structured products are huge business offshore but they are built on over the counter derivatives (OTC), which are not allowed here. Similarly, hedge funds and theme-based funds give investors a lot of options. However, every market evolves over a period of time and our wealth management industry is still at a nascent stage of growth. In the next five years our product basket will match the best in the world.
For original article, click here.
With the stock markets showing heightened volatility, high net worth investors are looking at ways of fortifying their portfolio. Pradeep Dokania, managing director and head of Global Private Client at DSP Merrill Lynch.
How has the volatility in the stock markets impacted the investment decisions of the wealthy? Is there a loss of confidence in equities as an asset class?
Well, it would be unfair to say that equities are losing their sheen because of the market correction. In some ways this correction was very much due.
If you look at the case of the Chinese stock markets, it went up to an all time high in January this year, but has corrected about 50% already. The Indian stock market has corrected about 40% in the same time. This just goes to show that globalisation has linked all of us together; no one is insulated. Typically, our clients would have a balanced portfolio, with about 55% of their money in equity and the remainder in debt. With the correction in the markets, we would have seen a 5-10% change in the portfolio.
What are the new products that high net worth investors are looking at to invest in?
Structured products have picked up quite significantly with more investors gaining comfort with them. Structured products allow clients to take a view on an underlying (indices, stocks, interest rates, etc.,) asset class depending on their risk appetite. So if a client has a positive view of a particular asset class from a 1-2 year horizon but doesn’t want to directly take exposure, he can do so via a structured product. These are mostly capital guaranteed and fortify an investor’s portfolio to a large extent.
Other products like gold funds and gold exchange traded funds are also becoming popular. Offshore investments are a huge area where we see growth and Merrill Lynch has the most comprehensive global platform to offer these to our clients. In markets like the United States leverage products are a huge business, but they are high-risk products and are not very popular here.
What are the offshore investments options available to investors today?
Global products available to Indian investors include hedge funds, global mutual funds, private equity, commodities and real estate. The option to invest directly in equities in different markets is also available. For instance, two years ago a lot of investors put their money in eastern Europe. Products like alternative energy funds, mineral funds, water funds, gold funds and BRIC funds were pretty popular. More recently, markets like Brazil have done well and it makes sense to invest there.
Even in the US, certain stocks have done pretty well. Prime examples include stocks like Apple Computer and Nintendo.
In ideal circumstances, how much of an investor’s portfolio should be diversified into offshore investments? What are the tax implications?
In ideal circumstances, 15% of an investor’s portfolio should be diversified into offshore products and the rest in domestic investments. At the moment, maybe only 1% of an investor’s portfolio would be exposed to overseas investments. It is also important to remember that people are just beginning to experiment with global products because they have very little exposure or experience of investing abroad. There is no additional tax burden of investing overseas. A high net worth individual would pay at his marginal tax rate, 33% in most cases.
What is the impact of exchange rate fluctuations for an investor looking at putting his money overseas?
Well it’s not that big a deal really. I mean for someone who is wary of putting his money in the dollar, we can give them the option of investing in the euro. Private bankers overseas say that India doesn’t have the product suite to offer to clients. Is that true? Well there is no doubt that in certain developed markets the product basket is quite wide. For instance, structured products are huge business offshore but they are built on over the counter derivatives (OTC), which are not allowed here. Similarly, hedge funds and theme-based funds give investors a lot of options. However, every market evolves over a period of time and our wealth management industry is still at a nascent stage of growth. In the next five years our product basket will match the best in the world.
For original article, click here.
China: Overseas Banks Grab Bigger Share (ShanghaiDaily.com)
By Zhang Fengming
OVERSEAS banks grabbed a bigger slice of the yuan wealth management products market in Shanghai in the first half of the year, the local regulator said yesterday.
Nine overseas banks, including HSBC, Citi, Standard Chartered and Bank of East Asia, had launched yuan-backed wealth management products by the end of June with an outstanding products value of 7.3 billion yuan (US$1.06 billion), up 65.82 percent from the beginning of the year, said the Shanghai Bureau of the China Banking Regulatory Commission.
The outstanding products value grew 3.76 times the level of a year ago. Overseas banks took in 5.14 billion yuan in the first half, already more than last year's total, the local banking watchdog said.
"Domestic banks still lead the yuan wealth management products market," said the regulator. "However, the rapid expansion recorded by overseas players is worth more attention."
Yuan-backed products contributed 78.06 percent of the total wealth management products in the city in terms of outstanding value. Yuan products accounted for 84.91 percent of products launched in the first six months.
Overseas currency-denominated products grew sluggishly in the city.
Overseas banks dominate in the structure products and qualified domestic institutional investors, while domestic banks have a bigger say in the trust-investment and currency products.
With more overseas banks offering yuan-backed trust products and more lining up to do so, this may change. Overseas players accounted for 49.53 percent of the city's total structured products, such as those linked to stock or commodities, with an outstanding products value of 13.2 billion yuan.
New products launched in the first half of this year have already surpassed last year's total in value.
OVERSEAS banks grabbed a bigger slice of the yuan wealth management products market in Shanghai in the first half of the year, the local regulator said yesterday.
Nine overseas banks, including HSBC, Citi, Standard Chartered and Bank of East Asia, had launched yuan-backed wealth management products by the end of June with an outstanding products value of 7.3 billion yuan (US$1.06 billion), up 65.82 percent from the beginning of the year, said the Shanghai Bureau of the China Banking Regulatory Commission.
The outstanding products value grew 3.76 times the level of a year ago. Overseas banks took in 5.14 billion yuan in the first half, already more than last year's total, the local banking watchdog said.
"Domestic banks still lead the yuan wealth management products market," said the regulator. "However, the rapid expansion recorded by overseas players is worth more attention."
Yuan-backed products contributed 78.06 percent of the total wealth management products in the city in terms of outstanding value. Yuan products accounted for 84.91 percent of products launched in the first six months.
Overseas currency-denominated products grew sluggishly in the city.
Overseas banks dominate in the structure products and qualified domestic institutional investors, while domestic banks have a bigger say in the trust-investment and currency products.
With more overseas banks offering yuan-backed trust products and more lining up to do so, this may change. Overseas players accounted for 49.53 percent of the city's total structured products, such as those linked to stock or commodities, with an outstanding products value of 13.2 billion yuan.
New products launched in the first half of this year have already surpassed last year's total in value.
Tuesday, August 12, 2008
Derivatives Week: Ex-Countrywide Structured Pros Hunt New Home
A team of nine structured products officials recently let go by Countrywide Securities is in talks to join a new firm.
by Katy Burne
Derivatives Week
A team of nine structured products officials recently let go by Countrywide Securities is in talks to join a new firm.
“We’re looking to attach our group to a broker/dealer or a dealer/bank,” says Kevin Mahon, former senior v.p. at Countrywide in Ft. Lauderdale , Fla. “We’re talking to several firms,” he added, declining to elaborate. The structured products team specialized in underwriting equity-linked and principal protected notes and also focused on reverse convertibles.
Bank of America bought Countrywide in July but opted not to keep its securities arm due to overlaps in the businesses, Mahon said. He spent 10 years at the firm and was supported by six salespeople—five at the v.p. level and one a senior v.p.—as well as two traders. Three staffers were based in Calabasas , Calif. , and their last day will be Sept. 9. The others’ last day was Aug. 10.
All are serving non-working notice periods with non-competes. “We were told we were free to look for jobs. They are not trying to see anyone unemployed,” said Mahon , who is leading discussions with potential employers.
Countrywide’s main rivals as a structured products wholesaler were Barclays Capital and LaSalle Bank’s broker dealer services division.
by Katy Burne
Derivatives Week
A team of nine structured products officials recently let go by Countrywide Securities is in talks to join a new firm.
“We’re looking to attach our group to a broker/dealer or a dealer/bank,” says Kevin Mahon, former senior v.p. at Countrywide in Ft. Lauderdale , Fla. “We’re talking to several firms,” he added, declining to elaborate. The structured products team specialized in underwriting equity-linked and principal protected notes and also focused on reverse convertibles.
Bank of America bought Countrywide in July but opted not to keep its securities arm due to overlaps in the businesses, Mahon said. He spent 10 years at the firm and was supported by six salespeople—five at the v.p. level and one a senior v.p.—as well as two traders. Three staffers were based in Calabasas , Calif. , and their last day will be Sept. 9. The others’ last day was Aug. 10.
All are serving non-working notice periods with non-competes. “We were told we were free to look for jobs. They are not trying to see anyone unemployed,” said Mahon , who is leading discussions with potential employers.
Countrywide’s main rivals as a structured products wholesaler were Barclays Capital and LaSalle Bank’s broker dealer services division.
Friday, August 8, 2008
Bonds.com to Distribute Structured Products (StructuredRetailProducts.com)
BOCA RATON, Fla. -- Bonds.com Group, Inc, through its subsidiary Bonds.com, Inc., provider of an innovative comprehensive online trading platform providing execution, liquidity and competitive pricing to the fragmented fixed income marketplace, announced today that it was recently the subject of a feature article on StructuredRetailProducts.com, the leading online resource for the structured products market. The article highlights the Company's recent major announcement that it will shortly be adding structured products to its offering.
"We have had a tremendous amount of reverse inquiries," Bonds.com CEO John Barry told SRP. "We realized that eventually we wanted to roll into this product segment." Until now, Bonds.com offered only plain vanilla fixed-income securities (specifically corporate agency securities, corporate retail notes, municipal bonds and fixed-rate certificates of deposits).
"Adding structured retail products (including commodity-, currency-, equity- and interest rate-linked securities) allows Bonds.com to help clients diversify their portfolios beyond fixed-income products and gives the firm a whole new revenue stream and business to grow," Barry said. "Bonds.com can offer the one-stop-shopping everyone is looking for."
Click here to read the entire article.
"We have had a tremendous amount of reverse inquiries," Bonds.com CEO John Barry told SRP. "We realized that eventually we wanted to roll into this product segment." Until now, Bonds.com offered only plain vanilla fixed-income securities (specifically corporate agency securities, corporate retail notes, municipal bonds and fixed-rate certificates of deposits).
"Adding structured retail products (including commodity-, currency-, equity- and interest rate-linked securities) allows Bonds.com to help clients diversify their portfolios beyond fixed-income products and gives the firm a whole new revenue stream and business to grow," Barry said. "Bonds.com can offer the one-stop-shopping everyone is looking for."
Click here to read the entire article.
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