Structured products offer customised investment strategies, access to asset classes investors cannot invest in directly, and convenience, with the design, implementation and execution outsourced to product designers, according to Franck Fayard, director, head of product engineering, Asia at Commerzbank, speaking at the SRP Asia-Pacific Structured Products & Derivatives Conference at The Renaissance Harbour View Hotel in Hong Kong on September 19.
As well as meeting this pure investment objective, generally through funded products, they also offer the opportunity to hedge. "For private banks, it is easier to advise on the former, but more difficult to advise on hedging," said Ghyslain Ladret (pictured), head of cross asset structuring, Asia Pacific, global markets division at Credit Agricole. "Firstly, private clients do not have access to the full toolbox that institutional customers have. They cannot necessarily deal Isda derivatives instruments, because private banks will not necessarily want to enter into complex Isda Credit Support Annexes, for example. Further, a purely derivative instrument is more complex to sell than a funded products."
But hedging remains a frustrating area, which has encouraged the development of strategies where, rather than hedging, you anticipate, through tactical or strategic hedging. "You anticipate by preparing portfolios to be more resilient to market shocks, from diversification across equity instruments, focusing on and optimising sharp ratios, but also increase your allocation to risk premia," said Fayard.
"There is hype in the retail and institutional level, but there is action at the institutional level, particularly in Asia, especially due to the education from banks and index providers, and now Fintech and independent companies," said Fayard. "For equity market, organise portfolios by low volatility, momentum, quality, carry strategies and volatility spreads. It's a long pitch. It needs to be on a global basket with diversified risk premia and works best with institutional investors, and the discretionary part of wealth management."
While the hunt for uncorrelated asset classes has been tough, "we have designed some swaptions or cap to hedge clients against interest rate hikes, whereby they just paying a premium and buying protection that will be paid as a payoff," said Ladret. "For equities, it is difficult to hedge by buying options, because the cost is extremely high, so we have been looking for proxy hedging. It is not perfect, but at least when you look at some strategies, such as hedging the equity market through credit derivatives, there is a lot of literature about the link between credit and equities. You can be long some equity derivatives relatively well-hedged. Some institutions have been doing this."
As far as the investing objective, there are risk returns on offer that can only be offered through structured products, according to Harold Kim, founder & chief executive officer at Neo Risk Investment Advisors. "We are launching our first fund: the concept is very simple, it is an Asian equity fund designed to cope with the Asian risk premium of volatility," said Kim. "It is not easy to get factor risk premium products on Asian factors, for a number of reasons. This adds value to our investors. The end product is a simple MSCI Asia ex-Japan equity product, but we are building in some exposure to risk factors and controlling risk in such a way that the downside is doubly protected, while you retain most of the upside. You couldn't do this without the use of structured products."
When Neo started working with investors requesting Asian exposure and reduced risk, Kim looked at ways to reduce risk, such as derivatives, hedging and dynamic asset allocation - all ways to control risk on a core equity exposure - and diversification.
"When we thought about how to deliver an equity product that had the same or better alpha but less risk, we started to figure out ways that we could add one or two or three, or all four of these approaches," said Kim. "Asset allocation, for example, is a very powerful tool to control risk: when equity risk goes high, you allocate away from it. Doing it systematically is something that you can embed in a structured product quite easily, so that's part of our solution. When you look at investing in equities, there is a quite a lot of work about systematic exposure to factor risk premiums, if you can get them the right way. That is something, again, that structured products can facilitate. It's diversifying exposure, not diversifying into commodities or rates.
"We took both approaches and produced a new exposure, invested in Asian equities, but with a risk-return profile that comes out is quite different," said Kim. "Our drawdown is a quarter of that of the Asian equity benchmark; the risk overall is one-third less; and yet we get a higher return."
The product is an indication of the degree to which investors in Asia have evolved. "They are more mature, they know what the risks are and they can completely understand, because they are entrepreneurs, when they invest somewhere, they have liabilities as well," said Ladret.
For the largest institutional investors, the move, particularly over the last month, has been to increase exposure to equity markets and move away from fixed-income markets, driven by a need for yield. "We have been in touch with a Japanese regional bank that has a Yen200bn portfolio maturing in the next six months and intends to reinvest a third of the proceeds into equity markets," said Fayard. "They will put it into Reit stocks and buywrite strategies balanced with some equity exposure. Structured products have a role to play in investment portfolios when it comes down to extracting yield from equity markets.
"Another trend we have seen is an increase and renewed interest for Asian markets since the beginning of the year from European investors," said Fayard. "More recently, this has included Japanese equities.
And, for innovation, "we have launched fund flows for asset allocation in the form of investable products," said Fayard. "Around 18 months ago, we started a partnership with research and created investible indexes giving investors exposure to global equity and fixed-income markets. These products used to be only available to institutional investors, but we made them available to private investors, with full protection and upside exposure."
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