Warren Buffett once famously described derivatives as financial weapons of mass destruction. Damning words indeed.
However, this didn’t stop Mr Buffett, the world’s third-richest man, declaring profits of $1.1 billion of derivative gains in the first nine months of last year.
Clearly, in the right hands, derivatives – and structured investments in general – can be a profitable and risk-sensitive part of any investor’s portfolio.
So what are the key elements family offices need to keep in mind when pursuing structured investments?
Transparency: Family offices must have a clear and accurate idea of what the embedded fees are in structured investment trades.
These fees are the foundation of whether derivatives will provide successful returns and it is possible, with the right expertise, to isolate and define them before taking the plunge.
Variety: One of the pitfalls of investing in derivatives through traditional investment banks is that they typically only provide access to their own products. This is not always in a family office’s best interest.
However, having access to a dozen or more trading desks can drastically improve an organisation’s ability to optimise investment in structured products.
Do your research: Many family offices are not even considering structured investments, largely due to negative press and market assumptions as to their integrity.
But with the right knowledge and tools at your fingertips, there is no reason why structured investments can’t deliver significant value.
Choosing the right partners: Finding the expertise required to maximise the profitability of structured investments can be a challenge – particularly if you are lacking the abilities in-house.
When selecting an appropriate partner, consider whether they offer truly independent advice, as well as access to state-of-the-art pricing models and clear fee structures.
Affinity Capital offers family offices a range of services in the derivatives and structured investments niche, providing transparent, expert analysis in this complicated area.