CBOE adds downside protection via Vest

The Chicago Board Options Exchange (CBOE) has made a majority equity investment in Vest Financial Group, an investment advisor that provides options-centric products in the US market. Previous investors in Vest, including Y Combinator, Payment Ventures, and First Round Capital, have exited.

Vest provides options-based investment advisory services through packaged products and technology solutions for options-based investments with a focus on downside protection. The acquisition of Vest is a reflection of the work CBOE is doing to promote the use of options and adds a new channel for the exchange to reach a broader set of investors seeking to use the benefits of options for their investments, according to John Deters (pictured), chief strategy officer and head of corporate initiatives at CBOE. "Investing in options (monitoring option series periodically, modelling investment positions...) comes with a lot of administration burdens for the average long-term equity investor and we wanted to offer them new tools to address some of the issues they face," said Deters. "CBOE has a very strong in-house options expertise [and] have developed one of the most comprehensive range of options-based products out there including options strategy indices (such as the CBOE S&P BuyWrite Index - BXM) and some of the most liquid benchmark products such as the CBOE Volatility Index (VIX Index), and S&P 500 options (SPX)) - the most active US index option."

As a result of the investment, Vest becomes a majority-owned subsidiary of CBOE with Karan Sood remaining as chief executive at the firm. Bill Kung, Vest's former CEO, will step down from his current role as president to focus on Vest's technology solutions business. Vest's technology-powered managed account advisory platform will continue to be accessible through financial advisors providing investors with access to the same investment tools and protections available to institutions and high net worth individuals, said Sood. The platform enable investors to choose the desired level of risk for new or existing stock/exchange-traded funds' (ETFs) positions, then structures a "protective strategy" using a portfolio of exchange-traded options to match the investor's personalised investment objectives and desired protection as closely as possible.

Under the terms of the acquisition CBOE's proprietary products, strategy indices and options expertise will be integrated into Vest's platform substantially reducing the complexity of options trading while providing investors with targeted protection, enhanced returns, and "a level of predictability unattainable with most other investments". Vest plans to expand its product offering with a range of unit investment trusts (UITs), mutual funds and exchange traded products (ETPs).

"We recognise that not all financial advisors use managed accounts," said Sood. "Our structured unit investment trusts (SUITs) methodology will be licensed to UIT sponsors, and we expect to see a product based on the methodology to be launched soon. Our range of SUIT products will provide access to risky assets with a balance between protection and upside exposure. We believe SUITs extend the reach of structured investments, particularly to investors who may be unable to participate in structured notes due to compliance restrictions that may arise from credit risks, liquidity risks or tax sensitivity."

According to Sood, the initial focus of Vest's SUIT products will be on equity-linked structures with simple payoffs. "Protection is a topical concept due to the recent volatility in the market [and] certain types of investors see high utility in a level of downside protection, in exchange for capping their upside potential," said Sood. "As these products become more mainstream we can see use case in other asset classes, as protection resonates with investors in all asset classes."

CBOE is also keen to expand its capabilities and coverage in the structured products market, according to Deters. "Structured products appeal strongly to high-net worth and institutional investors, and we see that geographically these products have traction and a strong target base," said Deters. "This acquisition provides us with the opportunity to bring the benefits of traditional structured products further down market, to the more average retail type of investor."

Vest will also enable CBOE to serve the retail side of the market by leveraging the firm's multi-faceted approach to its offerings. "[Vest's] set of products has different characteristics and appeal to different groups of investors and risk profiles," said Deters. "The Unit Investment Trust (UIT) is a good example of how traditional structured products can be brought to market in a flexible, customised wrapper that can address timing and tax considerations. They can be highly customised, and can be easily replicated again and again."

Deters also said that Vest's downside protection offering also "fits very well" with CBOE's fundamental view that protection can be offered through options. "Investors understand the benefits of portfolio diversification but when it comes to more pointed exposures the use of options to protect investments in a cost-efficient way is underestimated, and we want to promote that kind of insurance among investors," said Deters.

Vest expects to increase its profile on the back of CBOE's strong footprint in the US market. "CBOE is globally recognised as a leading exchange for derivative products and has a rich history of product innovation, making them the ideal strategic partner for us going forward," said Sood.

CBOE's investment in Vest was funded with existing cash. It is not expected to be material in terms of CBOE Holdings, Inc.'s revenue or earnings for 2016.