Yield and capital protection has boosted market activity in Hong Kong, UBP

The market for structured products in Asia has been very buoyant in the past nine months and this trend will continue next year, according to Jason Lee, head of structured products at Union Bancaire Privée (UBP) in Asia. "The strong demand was, and still is, the result of investors searching for yield as well as for protection, particularly in the fund-linked product space, as markets remain highly valued and continue to rise further," said Lee.

According to Lee, it is becoming increasingly difficult for UBP to differentiate itself in terms of actual structures or products as structured investments are easily replicable. "The key differentiating factor we aim for is in the advice we provide," said Lee. "This can be achieved through on-going education but more importantly by having highly experienced specialists to support the discussions with clients."

Lee noted that to be successful in the structured products market it is not only about having the right product, but about advising at the right time and with the right rationale. "For structured products, this can be very complex as it is not only in the optics or the headline coupon of the product," he said. "It is about understanding how the product is priced, what is it sensitive to and how to optimise the risk profile for the client."

The Swiss bank is currently focused on a number of projects around technology and increasing the efficiency of its processes, according to Lee. "In addition, we are constantly looking at various products, new or old, in order to assess if they could bring value to our clients," said Lee. "We have been and will continue to analyse and study payoffs to study the risk profile of the products throughout their life cycle."

The preferred underlyings in the market remain large caps predominantly in Hong Kong and US. However, Lee points at a shift to European names on the back of the improving macro-economic picture of Europe. "This demand is the result of the continued search for yield as well as protection," said Lee, adding that a large part of the demand remains in the short term side (three to six months). "We have been successful in lengthening the tenor of products to achieve a better risk profile especially as equity markets reach new highs." Though the search for yield has been driving the market in the past few months, Lee explained that the demand for capital protection is growing as the Asia market is hitting new heights. Capital protection has also been an increasing factor predominantly on funds. We have seen an increasing demand for direct equity substitution with the view of keeping the bulk of the upside while having some downside protection."

Demand for leverage products in Hong Kong is also growing, according to Lee. "For private banking clients, leverage is often obtained through asset-backed lending or margining but we feel there is less demand for leverage within a product or inverse within a product," Lee said. "These are generally well provided through various listed avenues."

According to Lee, structured products can add value in various ways. "They have been used for yield enhancement for some time and we see that the bulk of the volumes remain in this space but can be used strategically for hedging as well as participation with protection becoming more of a theme for investors." Lee further explained that nowadays structured products are increasingly finding a role in portfolios as investors become more educated. "We [UBP] have used structured products in various ways in our discretionary portfolios, for example," he said.

However, the current pricing environment in Hong Kong has been negatively influencing the structured products market in Hong Kong, according to Lee. "The low interest rate and low volatility environment has made it more difficult in some areas as the risk reward payoff begins to feel less and less attractive," he said. "However, this has provided some opportunities such as in the structured funds which would not really work without a low volatility environment."

Despite the positive trend in the Hong Kong market the search for yield has pushed the risk reward into challenging areas for the industry as a whole, according to Lee, who also points at the "constantly changing regulatory environment" as a challenge to the operational environment with market players having to "update technology" to keep up with new regulatory requirements.

According to SRP data, a total of 12,547 products worth HK$43.8bn (US$5.6bn) have been added in 2017, year-to-date. As compared to the same period last year, the number of products increased by 203% while net sales decreased by 88%.