Structured products are being demanded by an increasing number of high net worth individuals as a means of attracting good returns, but mini...

Structured products are being demanded by an increasing number of high net worth individuals as a means of attracting good returns, but minimizing the risk of the initial investment at the same time. SG Hambros in London is witnessing a strong surge for demand for such products and is constructing evermore sophisticated products to cater for the demand.

“We are currently putting together around 4-5 structured products a month,” said Peter Gardner, head of product development, at a seminar yesterday in London. “There has been a doubling in the assets under management of structured products in the last year.”

Mr Gardner added that SG Hambros has an edge in the structured product area due to its parent, Société Générale, being a “powerhouse” in derivatives. “This helps enormously with the construction of the product.”

The London-based bank provides clients access to structured products with liquid assets of $1 million-plus. “Although to gain the maximum benefit of such structures,” Mr Gardner said, “liquid assets of $7 million would probably be required.”

SG Hambros is increasingly offering its clients Constant Proportion Portfolio Insurance structuring techniques—a more sophisticated product that enables active management of the structured product.

“This enables assets to be bought and sold throughout the life of the structure to ensure the optimum level of both risk and investment exposure are maintained.”

Mr Gardner said CPPI’s are very attractive in a low interest rate environment. “A CPPI structure borrows money to invest in the risky assets—obviously the expected return needs to beat the cost of the borrowing. If the interest rate rises and becomes higher than the expected return on the risky assets, the manager will stop the leverage (not the investment).”

Second generation CPPIs are the latest innovation, which increasingly allow banks to limit volatility and more actively manage the multiplier part of the structured product.

“One of the problems associated with CPPI is that the structure, whilst allowing for the active management of the underlying investments, does not allow for active management of the leverage,” said Mr Gardner.

He added that new techniques such as Dynamic Portfolio Insurance allow for the active management of the CPPI parameters (including the leverage) as well as the underlying investment.

Second generation CPPI’s have three levels of management:

• The alpha of the underlying investment managers—the asset allocation based on market expectations;
• The mathematical rebalancing of the CPPI—the active rebalancing between the underlying investments and the non-risky assets based on market trends; and
• The alpha of the product manager—the active adjustment of the leverage factor and other CPPI factors depending on the product manager's market expectations.

Mr Gardner believes SG Hambros will see plenty more structured product techniques. “Structured products are an investment area that still has significant room to expand and is constantly changing, benefiting from developments in financial engineering and derivative trading.”