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Structured Products

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What are Structured Products?

A structured product is a pre-packed investment strategy that is intended to allow investors to gain exposure to equity indices, a basket of stocks, currencies, interest rates and/or commodities with a managed level of capital risk.
Structured products are determined by two elements - the level of capital protection as required by the investor and a derivative which links the investment with an underlying index, a currency or a basket of securities.
Ultimately, structured products can add value to a well-diversified portfolio, provided that they fit the investor's overall strategy. Structured notes can also be used to access different assets classes in private client portfolios.

Classification

Wealth Managers therefore suggest that in some cases investors could hold a structured product instead of a bond.

Q. If a structured product could go down in price because it is linked to an underlying index, or because of its bond content/volatility shifts, where should structured products be placed in client valuations?
A. Some argue that structured products should fall under a separate section in a client valuation, but when it comes to using them in a portfolio, they can be used instead of fixed income or equities.

Q. How do firms classify structured products? If a client holds a structured note instead of US equities, is it listed under US equities?
A. Structured Products are a way to access other asset classes, hence the term derivative. Therefore it is difficult to classify however, they are usually placed into valuations based on underlying exposure.

One must also be aware of the credit risk underlying the products, as exposure to one institution can add up across a range of structured products with potential cross-over with fixed income, for example.

Diversifying risk

Structured Products also address the issue of ensuring clients that they are not exposed to concentrated counterparty risk - thanks to new types of products coming on the market. New types of structured Ucits funds hold a range of structured products, rather than being based on one autocall. This new breed of fund that is based on a range of products also means that providers can lower the amount they have in collateral gilts, so they have more opportunity to generate returns than a typical Ucits III offering. Such type of product also has no exit date, because it is being rolled forward continuously.

       
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