Q&A: the lowdown on structured products

PWM: How do traditional funds compare with structured products?

TS: All investment products are a method of gaining exposure to markets and underlying financial instruments.  While traditional long only funds give one to one exposure – they rise when the underlying rises and fall when it falls – structured products allow investors to be more precise about the exposures they are taking. Traditional funds also expose the investor to manager skill, whereas many – but not all – structured products will be linked directly to the underlying security or index. 

PWM: Why are structured products selling so well?

TS: Structured products are very popular for three main reasons: they allow investors to get exposure to assets that can be difficult to invest in; they allow investors to be precise about the amount of exposure/risk they take, in other words they offer capital protection; and they can attract and maintain high leverage levels, thus altering the expected returns

PWM: Which types of structured product are selling best?

TS: A real mixture of both underlying and structures. Simple structured products based on falling or low interest rates, which have been popular over the last few years, have given way to more complex structures on interest rates. There is also more activity in FX and equity markets – both indices, baskets of shares and single positions. And there is some appetite for structured products around hedge funds or hedge fund indices, especially the CSFB Tremont Index.

PWM: In what ways has the structured product “industry” changed during the past three years?

TS: The structures are becoming a little more complicated, as are the underlying, for example, correlations between indices or shares rather than simple directional bets.

PWM: How should distributors, fund manufacturers and investment banks go about creating structured products for affluent investors?

TS: Most of our activity in structured products area is done on a bespoke basis. We will discuss with the client what they are trying to achieve and how best to structure it. Anyone that creates a structured product and then is looking to sell it to a client base must first look at the underlying investment/exposure and ensure that it is attractive.

PWM: How is the cooperation between these different types of institution working out?

TS: We act in many capacities: we create our own structured products but also trade with other firms to offer our clients the best ideas and pricing. We also deal with many third-party fund managers as well as managing a substantial amount of client assets in house. It is becoming more common for hedge funds to offer capital protected versions of their funds or fund of funds.