Structured investments are becoming an increasingly popular asset class, as investors look to benefit from predefined returns, known maturity dates and a finite number of potential outcomes. Another key advantage of structures is the breadth of choice available, which allows institutional investors to select a financial instrument that is tailored specifically to their portfolio needs.
Finding the right structured investment for your risk profile may require the assistance of an experienced financial investment boutique that can offer you independent advice and negotiate the best pricing on your behalf. Meanwhile, this article will provide a brief rundown of the common types of structure available.
A capital protection structured investment is typically the lowest-risk option for clients. As the name suggests, these instruments provide you with either full or partial protection on the money invested. Some products may offer 100 per cent protection, although the returns at maturity will be lower than structures where some of your capital is at risk.
The return potential of a structure is linked to the performance of an underlying derivative; the riskier the option or the greater the capital left unprotected, the higher the projected returns. Nevertheless, structured investments with capital protection are best suited to investors with a low appetite for risk or a keen focus on wealth preservation rather than growth, such as family offices.
Investors that are happy to take on a higher level of risk can opt for yield-enhancement structures. While capital protection sometimes exists for these instruments, it is usually conditional. For example, your money may only be protected if certain barriers remain intact, such as the price movement of an underlying asset not exceeding a certain benchmark.
Yield-enhancement structures often pay a fixed coupon that is issued either at par or discounted, and they have capped upside potential. In order to receive a one-off or recurring payment through the coupon, investors sacrifice their unlimited participation in the underlying.
A common feature of participation structures is leveraged upside potential, with little or no capital protection. In other words, investors put capital at risk in order to multiply their possible gains. These structured investments are therefore more suited to more aggressive clients.
Credit risk is a factor with participation structures, although, like yield enhancement instruments, partial capital protection can be achieved if certain conditions are met. These structures do not generally pay a coupon and the return at maturity is often calculated according to the participation ‘rate’. The performance of the underlying is multiplied by the participation rate to calculate the final payout.
“Finding the right structured investment may require help from an experienced financial investment boutique.”
These structures are typically the highest-risk offerings, allowing clients to generate large returns from smaller investments. The drawback is that the entirety of the capital can be at risk, making them more suitable for experienced investors taking a short-term approach.
In fact, investors often use leveraged structures to capitalise on a predicted sharp rise or decline in financial markets. They are also used as a way to hedge a portfolio.
As we can see, structured investments offer a wide variety of choice for investors with wildly different risk profiles and portfolio objectives. Moreover, these are just some of the features that structures can possess.
While structures may seem complex and opaque, organisations with access to the right financial advice and derivatives expertise can experience significant benefits by adding this asset class to their existing investment strategy.
Specifically, investors can benefit from instruments that provide predefined returns across up, down and flat markets, which can be a key advantage in today’s increasingly volatile financial environment.