Structured products are a useful way to customise the risks and returns of an investment to best fit your objectives. Although the fundamental rules of financial products still apply – that there is no reward without taking risk – you can structure your exposure in line with your individual risk tolerance.
These investments are designed or “structured” to meet a particular set of investment objectives or hedging requirements. They are an extremely flexible class of financial instruments that can be tailored to provide a variety of payoffs and risk/return profiles across all major asset classes. However, not all structures are appropriate or suitable to all investors and sometimes making the product more suitable to an individual’s needs may reduce the potential return by such an extent that it becomes unattractive or expensive.
What are structured products?
Structured products can sometimes provide an attractive alternative to direct investments. Investors can customise risks and returns to best fit their investment objectives: structured products enable them to define their exposure in line with their risk tolerance. Like all financial instruments, they are governed by the fundamental financial tenet that “without risk there is no reward”.
They are single-packaged investments that combine different building blocks. The range of financial instruments that can be used is virtually unlimited, which allows us to offer products tailored to the needs of the most sophisticated clients.
Structured products can be linked to a large range of asset classes. Components from any of the following can be used, in isolation or in combination:
The instrument to which the structured product is linked is typically referred to as the “reference underlying”
The use of structured products is not limited to expressing a view on the performance of an asset, they can be designed with payoffs and coupon profiles that reflect different views on the reference underlying such as:
Understanding both the product return profile and the nature of the risk taken is an important step when considering an investment in structured products.
However like any other investment, these products do not offer any guarantee and the investor needs to understand fully the risks associated with each product.
The main risks are:
Issuer credit risk
Any coupon, return and the repayment of the initial investment are subject to the credit risk of the issuer of the product. If the issuer defaults, investors may lose of all their investment. We endeavour to offer exposure to high-quality issuers with good credit ratings.
Principal protection is only provided at maturity; early redemption may result in the loss of capital, redemption penalties and a poor return. Some structured products are not principal protected at maturity and investors may get back less than the original sum invested. An investor should not invest in “principal at risk” products unless he is prepared to lose some or all of his investment.
When an investment is denominated in a different currency than the investor’s local or reporting currency, changes in exchange rates may have an adverse effect on the value, price or income of that investment.
Limited secondary market
Some structured products may not have daily pricings in abnormal market conditions. Some may suffer from reduced liquidity in such conditions or may offer a very limited liquidity in the secondary market.