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Rise of Structured Products in Wealth Management

Credit crisis in 2008 highlighted the risks associated with complex derivatives and securitization. However complex and exotic derivatives have also helped to diversify risks in the form of structured products that form part of alternative investments in wealth management. Above Pic Source: Credit Suisse

Structured products, as described by the Financial Industry Regulatory Authority (FINRA), are securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency and swaps. Structured products can be a plain vanilla product (composed of zero-coupon bond and put/call options) or can have exotic options (digital options, look back or knock out structures) and can be principal and non-principal protected. Structured products could range from simple index-linked structures which are principal-protected to non-principal protected structures having credit default swaps as an underlying asset class. Globally, low-interest rates have driven investors in search of high yield products apart from traditional asset classes like equities, fixed income, and real estate.

Structured products are one of the fastest-growing products in alternative investments especially in Asia in private banking and wealth management for high net worth investors (HNI investors with an investable surplus of USD 1 million). Structured products help investors to diversify their risk and form an important asset class in Markowitz’s portfolio theory of efficient frontier. Structured products can also be tailor-made by asset managers for investors (HNI/UHNI) depending on their risk profile, investment horizon, and view of the underlying index. Moreover, structured products appeal to the growing investment savvy investors who are themselves sophisticated enough to understand complex derivative structures and investment strategies.

According to Credit Suisse, global wealth is $253T with Asia especially China as the biggest growth market and not surprisingly has the second-highest number of millionaires next to the United States. After credit crises, the appeal of complex structured products which are more common in the United States and Europe is on a decline with simpler vanilla structure products being favored especially in Asia. Strict rules and regulations against complex derivatives and nonexistent CDS market except for a few blue-chip companies and non-convertibility of currency esp. in India limit the scope of complex structured products in emerging markets. In India, about 90% of the structure products are equity-linked products to Nifty while in China trusts and vanilla structures are sold routinely in unregulated shadow banking.

Going forward as capital markets especially the derivative markets develop and become more complex in emerging markets like China and India and as investors become more investment savvy, structured products will play a pivotal role as a diversification option compared to traditional asset classes like equities and fixed income. According to Warren Buffett derivatives might be financial weapons of mass destruction but when used judiciously it helps to diversify risk and add liquidity to the system.

The richest 1% of the world’s population now owns 50% of its total wealth, according to Credit Suisse. Why?? Is this information not disturbing?


The report has been edited for spell checks and the tutorial added since its original publication.


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