Fund-linked products increased in popularity after rates started to rise three year ago, according to Avyakt Agarwal, director of cross asset distribution sales at Societe Generale in Singapore, speaking on the Leaders' Forum: The Market Talks panel at the 5th Asia-Pacific Wealth Management & Fintech Conference at the Sofitel Singapore City Centre Hotel in Singapore on April 18.

"Investors saw value in buying optionality, and that value has continued to increase over time," said Agarwal. "For a year and a half, the rate rose from less than 0.5% to 2.5%. Moving from fixed-income funds, we can look to doing similar products on multi-asset funds. Also, products can be linked to baskets of funds, which are not necessarily just fixed income but a combination of equity, fixed income and multi-asset as well."

But this is just one part of the picture. "The second aspect is moving on in terms of product payoffs," said Agarwal. "We have seen clients looking to do hybrids on funding products, including rates and foreign exchange. It is a very niche area right now and clients are still getting comfortable with it, but it should continue to evolve. So far, we have talked about call options and funds. But we could also look at more correlation trades, for instance. Best-of and worst-of options and rainbow baskets will probably be the next steps."

Since rates have risen so quickly over the last three months, the funds have performed well although this has not been mirrored by demand, according to Agrawal. "When a product grows very quickly, at some point it starts to lose popularity and the next best thing comes about," said Agarwal.

Fund-linked products in Asia are less advanced than in Europe when it comes to payoffs and underlyings, according to Xavier Burkhardt (right), executive director of Leonteq Securities. "You can definitely be more exotic in Europe, but, when it comes to underlyings, we wanted to include some blue-chip names," said Burkhardt. "This allows access to more asset classes. We see interest in floating-rate risk strategies, like preferred securities and contingent convertibles."

The innovation in fund-linked products started two to three years ago, according to Ashish Jain (below), managing director and head of fixed income and commodities and equity derivatives sales for Southeast Asia and Australia at Natixis. "With trades being higher, there is interest in fund-linked structures and a genuine demand for innovation," said Jain.

Elsewhere, proprietary indices, which have "a very checkered history and have been seen as third-party indices", have been adopted as alternatives to traditional structured products, especially after the global financial crisis of 2008, according to Jain. "It is the index construction - the overfitting and the optimisation - that is to blame when the index doesn't perform well enough," said Jain. "Investors in Asia need more insight and education on what indices are used for and which indices are relevant for the different types of clients. There are much simpler and transparent value-added indices out there. For example, at the most basic, thematic indices."

Proprietary indices are more suited to institutional investors who understand the details of those strategies and the complexity involved, according to Agarwal. "For retail and wealth management investors, it is the wrapping that needs to be simpler, involving third parties as calculation agents, which helps to instill confidence in investors," said Agarwal. "Furthermore, the kind of index-linked products that get done need to be simple, such as thematic, delta ones or simple options. We leave it to the wealth managers to decide the theme they want to push for this year and then pick the appropriate indices and create the products accordingly."

Transparency is the main requirement of investors, according to Burkhardt. "For that purpose, we have seen more demand for thematic indices recently," said Burkhardt.

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