Structured products debate: New challenges in structured products

Delegate biographies: Learn more about the panelists

Executive summary • The structured products market has become much more of a mass-market business, attracting ever greater amounts of retail interest • Structured products have also become more commoditized and transparent • Sophisticated investors understand that structured notes are very different to asset-backed securities • Issuer credit risk is becoming a much bigger topic • Structured notes that involve the investor selling volatility are popular. However, pure volatility, correlation and dispersion plays are still the purview of highly sophisticated, specialist investors • There is a lot of interest in wrapping systematic trading strategies

JF, Euromoney:

APl, Citi: Within the structured products business over the last two or three years we’ve seen a massive expansion in two ways. First, market reach has become much broader, so it has become much more of a mass retail type of market. This in itself produces some challenges in terms of how we present products. But second, we’re also seeing that private clients, through the private banking networks, are now starting to integrate derivative strategies and structured products into the core parts of their portfolios. Private investors and private banks are no longer viewing structured products as a satellite allocation, or something to be slotted into the portfolio as part of the alternative allocation, along with an equity component and a fixed-income component, and so on. Instead, we’re seeing structured products being used to overlay entire portfolios as the core part of the asset allocation. High-net-worth investors have become much more conscious of what structured products can achieve.

GC, Credit Suisse: We use structured products as an element of portfolios to help dampen down volatility within those portfolios. We also use them to give exposure to areas that are risky. So we might use a structured product where there is a fat tail risk effect but where we want to gain the exposure because the returns could be attractive. The structured product lets us recognize the fact that there’s a risk there that can emerge from time to time. An example of that might be, say, an equity position on the Taiwan market, where occasionally there are frictions with China and you can get sudden movements in that market. So we tend to integrate structured products as part of the core investment, and use them to diversify risk, or add a little bit of risk skew into the portfolios.

ZM, RBS: The structured products market has become a lot more commoditized and far more transparent and, as such, a lot more competitive as well. Also, I think we have a far more educated client base in terms of the intermediaries who are sourcing products for their clients. It does seem as if structured products are moving more into the mainstream, but I think it’s a very slow journey. Our experience is that a lot of the newer fund managers are now more open to new ways of delivering alpha, and are far more familiar with structured products. Rather than putting nought to 5% of their portfolio in structured products, some fund managers are now prepared to go up to 10% to 20% of their portfolio.

APo, SG Hambros: From my perspective, I would say that the private banking clients that represent the upper end of the market are rather sophisticated and very receptive to structured products. Also, as has been alluded to, the relationship managers that we get today in the private bank are a very different breed to what they used to be. So not only are the clients becoming more sophisticated but the relationship managers also now have a much better understanding of what they are selling. Last, but no means least, the technology has evolved in terms of constructing products. The structured products themselves are becoming more sophisticated and more flexible in giving clients the opportunity to play a significantly wide variety of investment themes. Also the technology for ensuring the capital guarantee has become far more sophisticated. So, overall, I think we are still in the midst of quite a significant expansion of the market for structured products in terms of the quantity of the structured products we are selling but also in terms of the quality of the products and in terms of the degree of sophistication of the clients.

APl, Citi: One of the developments of note that has taken place over the last three or four years is how the product set has grown up from the point of view of the range of services that are built around it. Liquidity is the obvious first point. People should now be in a position to view structured products as being as liquid, or almost as liquid, as any other type of investment – the investor can expect a daily secondary market, and a guaranteed bid-offer spread on most products. With that, I think the industry is starting to get better at addressing issues around the quality of marketing material. At the end of the day, a structured product is only as good as the description of the concept on paper. I think we’ve got better at that over the years. But this cuts across the whole range of services, from educating the workforce to expressing how products work and giving people interactive tools to be able to understand the life within a life that a structured product has. We’re even recording educational videos that we show on our website.

JF, Euromoney: Let’s move on to talk about the credit crisis and the effects, if any, this is having on the structured note market. Are investors making the distinction between asset-backed structured credit exposures and what we would refer to as structured notes, or structured products generically, which of course are traditionally originated out of equity derivatives desks, even though today almost any exposure can be taken synthetically? Is the "structured" tag having a negative impact on all derivatives-based investments?