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.