Structured notes, have over recent years, become an attractive addition to retail and institutional portfolios looking to protect against downside risk while still benefiting from positive movement in the underlying asset(s).
In essence a Structured Note is a hybrid asset that includes a number of financial products typically an index, stock, bond or traded commodity together with a derivative. Formerly the luxury of large institutional investors, Structured Notes can now be offered to retail investors to assist them in managing their risk/return appetite and to provide capital guarantees where necessary. By way of a simple example, a well-known bank issues a Structured Note with a notional value of $10,000 with a five year term, the monies will be indexed to the S&P500. After five years if the S&P500 has gone up, the bank will pay out the $10,000 plus the gain in the S&P500. However, if the S&P500 has gone down over that period, the bank has guaranteed to pay back the initial investment of $10,000.
How is this achieved? The Structured Note is packaged with two key components, a zero-coupon bond and a call option on the S&P500. Although the pricing behind the note can be complex, the principle is fairly simple. The zero-coupon bond purchased will accrue from its original issue discount to the face value. For the performance component the S&P500 call option will have intrinsic value at maturity if the value on that date is higher than its value when issued. The return therefore is on a one-for-one basis. If not, the option expires without value and the investor gets nothing in excess of the $10,000 return of principal.
At Pointhaven, we make use of Structured Notes in portfolio management so that investors can effectively hedge against market downturns whilst still being in a position to capture market gains. Through our product suppliers, we can tailor Structured Notes to suit your individual requirements and complement other more traditional investment strategies in a bespoke solution.