Alternative Investments: Structured Products

Structured products display a number of features that are consistent with the themes of alternative investing. By keeping the majority of initial capital invested in a bond, they can offer downside protection to the investor with some upside potential. Or, by using derivatives and leverage, they can increase risk/return exposures significantly.

Furthermore, structured products can be linked to any asset class. The alpha generator could be a single stock, derivatives, commodities, foreign exchange or even a basket of hedge funds. This gives structured products the capability to offer the investor a range of risk/return profiles and a level of diversification that can rarely be matched by other investment products.

Nonetheless, investing in structured products can be daunting because of the range of products and strategies available. In general terms, the investor should keep in mind the following questions when analysing a structured product.

• What is the alpha generator?
• What is the time horizon?
• What is the level of protection?
• How is the protection achieved?
• What is the level of leverage?
• What is the derivatives exposure?