Participants at one of the workshop sessions at the SRP 2014 Asia-Pacific Structured Products & Derivatives Conference in Hong Kong last week discussed the latest industry initiatives on the development of structured solutions for ultra-high-net worth-investors (UHNWIs). The workshop panel discussed how this segment can effectively achieve its goals via simple and complex products, and the payoff structures that this area will likely see. They agreed that for the next 12 months the most popular strategies for UHNWIs will be based on protected-tracker, knock out, reverse convertibles and accrual payoff profiles, which are considerably different from what has been observed from the retail counterparts, according to SRP’s buy side survey representing the views of over 660 respondents.
“Apart from product performance, wealthy clients in Asia are in need for reputation, trust and continued partnership on the part of the providers and relationship managers especially in the post-Lehman era,” said Luigi Vignola, head of markets Asia Pacific at Julius Baer. “The same clients are also looking for opportunities to leverage on highly specialised investment banking capabilities with a private banking environment.”
The challenges in catering to this group for private bankers, said Vignola, are “to deliver the right information to add value for the clients, to understand and manage complexity though the product life cycle, as well as to come up with sensible solutions rather than suitable products”.
In light of these challenges he stressed the importance of adapting to the fast-changing regulatory environment, developing skills of client relationship managers, and improving portfolio and risk monitoring tools.
How should UHNWIs use quant strategies in their portfolios?
SRP’s buy-side survey indicated that more than 47% of respondents cited offshore CNY products as the key investment theme over the next 12 months, followed by volatility-based derivatives (30%). Other popular choices included insurance/variable annuities, proprietary/custom indices and regulatory arbitrage.
Ken Sue, managing director, head of products and services at Coutts & Co, described a number of quantitative and algorithmic structured solutions available for wealthy clients and corporates in Asia. According to Sue, these products have a role in constructing meaningful investment portfolios for wealthy clients given their highly versatile and customisable nature.
“But during the evaluation process they also need to be aware of other factors such as the creditworthiness of the issuer, active versus passive management, after sales support in terms of liquidly, valuation and life cycle management,” said Sue. “Quant-based products cover an enormous array of wrappers ranging from structured notes, CPPI funds, managed accounts to more simple listed instruments. Some structures consist of simple options and may offer a redemption profile that is deterministic or formula driven, while others such as CPPI or volatility target structures are path-dependent in nature and calls for more sophistication in the algo design.”
According to Sue, regardless of payoff complexity it is important that investors fully understand redemption profiles and how the movement of the underlying assets at any time would have an impact on actual returns.
In comparison with traditional buy-and-hold investment, Sue said some structured products “are more flexible in that they allow systemic rule-based allocation to cash – which is the most protective asset at times of market stress or high volatility – and vice versa to risky assets when the market shows momentum of growth”.
What has the industry done to rebuild investor confidence?
Joanne Leung, managing director of Private Wealth Management Association (PWMA), pointed to some of the latest initiatives implemented by the trade body in Hong Kong, including the launch of the first sales accreditation system in Hong Kong’s private banking industry.
According to Leung, the PWMA has been actively engaged in setting out and promoting high standards for private banking practitioners through its enhanced competency framework (ECF) – an accreditation system covering a wide scope of industry knowledge and applications with a strong emphasis on ethics and compliance. The ECF program is based on two training modules evaluated on the merits of examination scores and experience eventually leading to the qualification of certified private wealth professional (CPWP).
“As a relatively new association, we are yet to launch any initiatives with other associations in the region,” she said. “Nonetheless, apart from the ECF initiatives we have representatives from our member private banks which help liaising with local regulators to ensure our voices are heard on regulatory matters affecting the industry.”
Leung said that the association has also monitored its counterparts in Singapore, the UK and Switzerland “to work out what is the optimal system and process for Hong Kong”.