Chapter 19. Structured Investment Products

Wall Street's sales and marketing machine is continuously pumping out fairy tales: fanciful fables filled with legendary deeds and winning exploits. The only differences between many of the Street's product "innovations" and other types of fairy tales are that these stories are designed for adults, and they rarely have happy endings.

Like the apple given to Snow White by the Evil Queen, these products offer enticing features designed to lure investors, but almost all have one thing in common: Despite their seeming appeal, they have attributes that make them more attractive to the seller than the buyer. These products typically fall into the category called structured products.

Structured products are packages of synthetic investment instruments specifically designed to appeal to needs that investors perceive are not being met by available securities. As a result, they are often packaged as asset-allocation tools that can be used to reduce portfolio risk.

Structured products usually consist of an actual note plus a derivative or spinoff product. This second product derives its economic value by linking to the price of another asset, typically a bond, commodity, currency, or equity. A derivative often takes the form of an option (a put or a call). The note pays the interest at a set rate and schedule, and then the derivative pays off at maturity.

Because of their derivative component, structured products are often promoted to investors as "debt ...

Get The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.