In recent years, the range of structured products has increased enormously. Derivatives have long ceased to be the exclusive domain of institutional investors and are now being used extensively by private investors as well.
Derivatives substantially alter the risk profile of a portfolio: risk can be increased, reduced or even eliminated. Given the variety of products on the market, however, the challenge is how to benefit from derivatives and how to incorporate derivatives into a portfolio strategy with the aim of achieving sustainable returns.
The only sensible solution is to implement an integrated investment process that pursues a core/satellite approach based on a systematic investor analysis together with strategic and tactical asset allocation. In this approach, an index-based core portfolio is combined with various satellite investments offering carefully chosen investment focuses. Both the core portfolio and satellites mix traditional investments with structured products, options and futures. In the core portfolio, these various financial products are used for tactical optimization, whereas structured products in the satellite portfolio often represent the only opportunity for investments with a specific focus.
In the course of the investment process, information systems are used to visualize the actual risks being assumed. The derivatives employed are unbundled daily into their economic components. Furthermore, the value-at-risk approach enables each instrument’s ...