Structured notes (also known as structured investments) are on the rise as financial advisors aim to increase returns while also aiming to reduce risk in client portfolios. Structured notes are not necessarily an asset class but rather senior unsecured obligations of the issuer, typically consisting of a package of zero-coupon bonds and options along with built-in origination costs to create a single security. Structured notes are designed to enable investors to receive a clear payment that may be tied to the price of an index, stock or even gold. Structured notes can provide exposure to open markets on a protected or leveraged basis, often linked to underlying assets such as currencies, interest rates and market indices. Notes may target objectives such as yield, growth and/or protection and are designed to bridge gaps in the portfolio with a low barrier to entry.
According to a recent CAIS-Mercer Survey Among more than 250 independent financial advisers, nearly one-third of respondents currently allocate to structured notes, and one-quarter plan to increase allocations next year. Given the growth of the market and the versatility and flexibility of structured notes, this trend is expected to continue – total U.S. structured note issuance has grown by more than 68% in the past three years alone, and is expected to grow by 2023 Will reach $130B.
The history of structured investing
Investors in European and Asian markets They have been a leader in structured note issuance since the 1980s. By the 1990s, it spread to the United States as financial institutions sought innovative ways to meet investor demand for customizable investment strategies. Historically, these strategies have been used primarily by institutional investors and high-net-worth individuals. However, as technology makes it easier for financial advisors to access these strategies and allocate them to client portfolios, structured notes have since become more accessible to independent wealth pipelines.
Use these investment tools still low The proportion of consultants in the United States has grown significantly compared to European and Asian markets. The first step for advisors adopting structured notes is to help them understand how the strategy can benefit clients and educate them on the applicable risks.
Analyzing structured investments
Structured notes can serve as versatile vehicles to achieve a variety of investment objectives.
They can generally be divided into three broader product categories, focusing on growth, yield and protection. Within these categories, advisors can select specific products from the issuing bank that meet their required market risk, downside protection, upside potential and expiration time. Alternatively, advisors may seek to work with the issuing bank to customize structured notes to help meet the client’s specific investment objectives, address their risk-return profile and express their market views. Structured notes can become the centerpiece of defined-outcome investing, potentially enabling advisors to play offense and defense in the market.
Portfolio Structured Investments
As some advisors look beyond traditional 60/40 portfolios, they may consider implementing structured notes as a differentiator in their practices to attract new clients and gain more wallet share from existing clients.
Advisors tend to view structured notes in one of three ways—as part of an alternative investment portfolio, as a complement to a client’s core bond-fixed income allocation or as a hedge against their equity positions.
For advisors new to alternatives, structured notes can serve as a gateway into the field due to greater accessibility, lower investment minimums and lack of certification requirements. For advisors already using alternatives in client portfolios, structured notes can supplement their capital allocations and further close portfolio gaps.
Additionally, advisors may consider building structured notes over time through a step-by-step strategy rather than purchasing a single position. Through laddered structured notes, advisors can address concerns about market volatility by hedging timing risk, underlying asset and reinvestment risk as funds mature at different points in time.
Recently, structured note separately managed accounts have become increasingly popular due to their professional management, institutional pricing potential, and reduced operational burdens.
Additionally, advisors have recognized that when alternative funds and structured notes are paired in a client’s portfolio, advisors have access to both public and private markets. Structured notes offer more customizability than alternative fund investments, allowing advisors to address more specific investment objectives.
Key risk considerations for structured investments
Before investing in structured notes, it is important to understand the inherent risks and consider some of the implications of holding a position in the notes.
Generally speaking, structured notes are subject to certain investment risks, including but not limited to market risk, complexity, illiquidity, redemption risk and credit risk.
For example, because structured notes are generally unsecured obligations of the issuer, any payment or delivery of a structured note, including the repayment of any principal, is dependent on the creditworthiness and ability of the issuer to satisfy its obligations. Because structured notes are tied to the performance of the underlying assets, the value of the notes may increase or decrease due to market factors such as volatility, interest rates, economic or political changes, and investors may lose a significant portion or all of their initial capital. invest. Some notes have a call feature, which means that if the note is redeemed early, there is no guarantee that the investor will be able to reinvest the proceeds at the same rate of return.
Looking to the future
With more than 8 out of 10 financial advisors Allocations to alternative notes are expected to increase through 2025, and structured notes are likely to become increasingly popular. In recent conversations with advisors, many are increasingly pointing to the emerging relationship between funds and notes—with complementary objectives such as income, growth, or protection, notes can be considered alongside alternative funds and at lower Barriers to entry can help bridge portfolio gaps.
If you don’t educate your clients on structured note-taking, someone else will. Advisors can take full advantage of the potential benefits of these strategies by studying and understanding how they might fit into certain client portfolios.
Marc Premselaar is Senior Managing Director of Capital Markets at CAIS Capital LLC
