Structured Products in Portfolio

L

luisHK

Hi

What do you guys think of using structured products, any product where you get a prefixed rate as part as the non equity portion of a portfolio.
Obvious cons are high commissions imbedded in the product , lack of liquidity as those products usually have minimum hold periods and it doesn't quite work as a hedge on other products, it just adds a little return (not so bad if you can get 4% guaranteed - haven't checked for a while, it might be a little more now- over several years in USD) with no volatility, lessening the overall portfolio volatily.
As counterparty risks go, if the bank or broker who opened the contract goes bust in times of turmoil, the contract would still be valid with the issuer, right ? Some of the large issuers seem more solid than many banks around.
Those products don't seem very popular as I read more about traders keeping large stash in treasury bills and government bonds rather than long term structured products, but still think of adding some such in USD (I have some experience with RMB products, but more due to the difficulty of understanding and getting access to chinese products than their atractiveness)

What's your take on it, also, can you advise good products out there, available to private bank customers (if they get better deals with higher minimum Investment) or going directly to the issuer ?
 
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They're utter shit and you shouldn't touch them, it's designed for private banks clients who have no clue how the market works.

If for some reason you like the payoff, you can do them manually by selling an option

Yes the broker doesn't do anything, it's alla bout the issuer
 
A lot of them are sold with 'capital protection'
I was a financial advisor in 2009 and 2010 and a lot of my colleagues had clients with structured products in their portfolios. It was a bloodbath, no bids.
 
wintergasp said:
They're utter shit and you shouldn't touch them, it's designed for private banks clients who have no clue how the market works.

If for some reason you like the payoff, you can do them manually by selling an option
More...


Pretty sure i've been offered by bankers -when i was not interested- during the low rates period USD products with guaranteed returns of 4% (life insurance, but also at least another type of product, and annuities seem to work in a similar way)
How can you structure option trades to guarantee such return ?
Interested in investing less than 10% of a portfolio btw ( besides onshore RMB products, and anyone who has tips on how to get hold of corporate bonds there will be most welcome , tough place to invest if u can't read chinese and don't hold the nationality), I used to be unwilling to leave any money blocked for a long time but it is a lesser concern now, whereas what to do with the non equity part of the portfolio is an issue. Looking to keep some of the money safe and with higher guaranteed returns than in a saving account, not sure wether some (hedge) funds would be a better choice

Chuck Krug, what do you mean it was a bloodbath ? Nobody wanted to buy those products and the customers who had bought them couldn't get rid of them (which they are not supposed to do ) ? Or contracts were not honored ?
 
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Luis,

You can't always create them yourselves as often they have embedded exotic derivatives.

There is no exiting once you get in. A lot of asians lost a lot of money on the autocallables in 2008. However they also made a lot of money in the years prior to that.

Embedded commissions on the products I had looked at (in the US) were between 1-5percent.
 
Luis> 1)clients that had margin calls couldn't sell the structured products, because there was no bid. If there was a bid, on some, it was for 20 cents on the dollar.
2) The issuers of structured products sending letters to clients that they wouldn't honor the capital protection at the expiration
 
Chuck Krug said:
Luis> 1)clients that had margin calls couldn't sell the structured products, because there was no bid. If there was a bid, on some, it was for 20 cents on the dollar.
2) The issuers of structured products sending letters to clients that they wouldn't honor the capital protection at the expiration
More...

#2 was probably because the notes are actually creditors to the banks and those banks went under like Lehman.
 
luisHK said:
Pretty sure i've been offered by bankers -when i was not interested- during the low rates period USD products with guaranteed returns of 4% (life insurance, but also at least another type of product, and annuities seem to work in a similar way)
How can you structure option trades to guarantee such return ?
Interested in investing less than 10% of a portfolio btw ( besides onshore RMB products, and anyone who has tips on how to get hold of corporate bonds there will be most welcome , tough place to invest if u can't read chinese and don't hold the nationality), I used to be unwilling to leave any money blocked for a long time but it is a lesser concern now, whereas what to do with the non equity part of the portfolio is an issue. Looking to keep some of the money safe and with higher guaranteed returns than in a saving account, not sure wether some (hedge) funds would be a better choice

Chuck Krug, what do you mean it was a bloodbath ? Nobody wanted to buy those products and the customers who had bought them couldn't get rid of them (which they are not supposed to do ) ? Or contracts were not honored ?
More...

4% "guaranteed" by a structured product is impossible. you have some sort of barrier or callable product where you should make 6% with the same risk but because you buy it from the bank you end up just making 4%. Or the underlying zero-coupon is some shit company that borrows at 7% p.a. or 10% p.a.

I see maybe 25 structured products a week and I've never invested a single $ in any of them, never found any payoff useful or fairly priced
 
Thanks all for your replies, food for thought and research, although so far it doesn't look good.
I had to look them up but definetely not looking for products like autocallables, I can't check now what was offered to me, so maybe Wintergasp is right and there are no 4% guaranteed products out there (say in USD and from reliable issuers, I might ask again for life insurance information next time I pop in one of the banks, but don't want to encourage the Relationship Manager to flood me with offers)
And if after all time with the funds sleeping and fees absorbed the issuers backs off on his engagement, it looks very ugly.
Anyway more feedback on the topic will be welcome
 
So if you can get efficient pricing in these products, you can do things that are pretty nifty. For example, there is no real way you can replicate a double-no-touch or a continuous barrier - while those products give you an ability to sell volatility in a way that controls max loss. Just saying.
 
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