Tristan de Gouvion Saint Cyr talks about structured products and how they can benefit HNW investors.

Tristan de Gouvion Saint Cyr finance expert. Tristan de Gouvion Saint Cyr Investment Expert. Tristan de Gouvion Saint Cyr talks about how HNW investors can be benefited from structured products.

Tristan de Gouvion Saint Cyr quotes wikipedia on the definition of structured products in finance, which is a pre-packaged investment strategy based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuance and/or foreign currencies, and to a lesser extent, swaps.

A feature of some structured products is a "principal guarantee" function, which offers protection of principal if held to maturity. For example, an investor invests 1000 dollars; the issuer simply invests in a risk free bond that has sufficient interest to grow to 1000 after the five-year period. This bond might cost 800 dollars today and after five years it will grow to 1000 dollars. With the leftover funds the issuer purchases the options and swaps needed to perform whatever the investment strategy is. Theoretically an investor can just do these themselves, but the costs and transaction volume requirements of many options and swaps are beyond many individual investors.

As such, structured products were created to meet specific needs that cannot be met from the standardized financial instruments available in the markets. Structured products can be used as an alternative to a direct investment, as part of the asset allocation process to reduce risk exposure of a portfolio, or to utilize the current market trend.

Tristan de Gouvion Saint Cyr says that investors may benefit from the following advantages:

·         principal protection (depending on the type of structured product)

·         tax-efficient access to fully taxable investments

·         enhanced returns within an investment (depending on the type of structured product)

·         reduced volatility (or risk) within an investment (depending on the type of structured product)

·         the ability to earn a positive return in low yield or flat equity market environments

However, Tristan de Gouvion Saint Cyr warns investors about disadvantages including:

·         credit risk - structured products are unsecured debt from investment banks

·         lack of liquidity - structured products rarely trade after issuance and anyone looking to sell a structured product before maturity should expect to sell it at a significant discount

·         No daily pricing - structured products are priced on a matrix, not net-asset-value. Matrix pricing is essentially a best-guess approach

·         highly complex - the complexity of the return calculations means few truly understand how the structured product will perform relative to simply owning the underlying asset

Structured products are by nature not homogeneous - as a large number of derivatives and underlying can be used - but can however be classified under the following categories

·         Interest rate-linked notes and deposits

·         Equity-linked notes and deposits

·         FX and commodity-linked notes and deposits

·         Hybrid linked notes and deposits

·         Credit-linked notes and deposits

·         Constant proportion debt obligations (CPDOs)

·         Constant Proportion Portfolio Insurance (CPPI)

·         Market-linked notes and deposits

Tristan de Gouvion Saint Cyr insists on the fact that the risks associated with many structured products, especially those products that present risks of loss of principal due to market movements, are similar to those risks involved with options. The potential for serious risks involved with options trading are well-established, and as a result of those risks customers must be explicitly approved for options trading, making them suitable to accredited investors only.

                                                                    

Tristan de Gouvion Saint Cyr

Tristan de Gouvion Saint Cyr talks about an investment trend in today's markets: HFT.

The post-2008 market condition saw a drastic increase in volatility which lead to challenge market players, and find new solutions to benefit from this new environment.

Tristan de Gouvion Saint Cyr quotes Wikipedia: "Algorithmic trading, also called automated trading, black-box trading, or algo trading, is the use of electronic platforms for entering trading orders with an algorithm which executes pre-programmed trading instructions whose variables may include timing, price, or quantity of the order, or in many cases initiating the order without human intervention.

Algorithmic trading is widely used by investment banks, pension funds, mutual funds, and other buy-side (investor-driven) institutional traders, to divide large trades into several smaller trades to manage market impact and risk.^[Sell side traders, such as market makers and some hedge funds, provide liquidity to the market, generating and executing orders automatically.

A special class of algorithmic trading is "high-frequency trading" (HFT). Many types of algorithmic or automated trading activities can be described as HFT. As a result, in February 2012, the Commodity Futures Trading Commission (CFTC) formed a special working group that included academics and industry experts to advise the CFTC on how best to define HFT. HFT strategies utilize computers that make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe. Algorithmic trading and HFT have resulted in a dramatic change of the market micro structure, particularly in the way liquidity is provided. Algorithmic trading may be used in any investment strategy, including market making, inter-market spreading, arbitrage, or pure speculation (including trend following). The investment decision and implementation may be augmented at any stage with algorithmic support or may operate completely automatically.

A third of all European Union and United States stock trades in 2006 were driven by automatic programs, or algorithms, according to Boston-based financial services industry research and consulting firm Aite Group. As of 2009, studies suggested HFT firms accounted for 60-73% of all US equity trading volume, with that number falling to approximately 50% in 2012.

One of the main issues regarding HFT is the difficulty in determining how profitable it is. A report released in August 2009 by the TABB Group, a financial services industry research firm, estimated that the 300 securities firms and hedge funds that specialize in this type of trading took in roughly US$21 billion in profits in 2008.

 Tristan de Gouvion Saint Cyr investment portfolio management expert. Tristan de Gouvion Saint Cyr financial analyst.

Tristan de Gouvion Saint Cyr Quotes on Behavioral Finance

Tristan de Gouvion Saint Cyr quotes Wikipedia about a phenomenon that plays an important part in trading, called behavioral finance.

This field studies the effects of social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation. The fields are primarily concerned with the bounds of rationality of economic agents. Behavioral models typically integrate insights from psychology with neo-classical economic theory. 

Tristan de Gouvion Saint Cyr gives this video from Investpodia to illustrate the point:

As the pendulum swings between greed and fear, investors typically become over-enthusiastic during bull markets and over-despondent as the bear’s growl grows louder.

It stands to reason that in order to be a successful investor, it is important to distance yourself from the herd mentality and to take objective decisions based on fundamental reasons.

The typical behavior of investors is linked to the so-called investor psychology cycle (courtesy RMB Unit Trusts), as illustrated below.

 Before seeking to apply the cycle to the present stock market situation, let’s consider a short definition of each of the stages.

Contempt: According to the cycle, a bull market typically starts when a market is at a low and investors scorn stocks.

Doubt and suspicion: They try to decide whether what they have left should be invested in a safe haven such as a money market fund. They have burnt their fingers with stocks and vow never to invest again.

Caution: The market then gradually starts showing signs of recovery. Most investors remain cautious, but prudent investors are already drooling at the possibility of profit.

Confidence: As stock prices rise, investors’ feeling of mistrust changes to confidence and ultimately to enthusiasm. Most investors start buying their stocks at this stage.

Enthusiasm: During the enthusiasm stage, prudent investors are already starting to take profits and get out of the stock market, because they realize that the bull market is coming to an end.

Greed and conviction: Investors’ enthusiasm is followed by greed, which is often accompanied by numerous IPOs on the stock market.

Indifference: Investors look beyond sustainability high price-earnings ratios.

Dismissal: As the market declines, investors show a lack or interest that quickly turns to dismissal.

Denial: Then they reach the denial stage where they regularly affirm their belief that the market definitely cannot fall any further.

Fear, panic and contempt: Concern starts to take a hold and fear, panic and despair soon follow. Investors again start scorning the market and once again they vow never to invest in stocks again.

In order to determine where in the stock market cycle we find ourselves, the challenge is to identify the prevalent stage of the psychological cycle. I would, for starters, argue that we are on the right-hand side of the curve, but how far down the slippery slope sentiment has declined is less clear. It would seem that we are possibly in the region of the “denial”/“fear”/“panic” phases. Although enduring investor panic and fear have not really set in, the January, March and July sell-offs did witness climatic, albeit short-lived, bouts of despair.

Time will tell whether we are dealing with a typical investor psychology cycle and how it will play itself out. It does, however, seem that we are at not at the “contempt” stage yet, i.e. when investors scorn shares en masse and a bull market typically starts.

Realizing this mental process is the first step towards becoming a smarter, more rational investor.

Tristan de Gouvion Saint Cyr is an investment professional specializing in investment strategies for HNWI, ranging from vanilla products in various asset classes to sophisticated structured set-ups. Tristan de Gouvion Saint Cyr collaborates with investment bankers, asset managers, stockbrokers, life assurance companies and charities to create custom-tailored solutions