The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

STRUCTURED PRODUCTS

It is difficult to precisely define a structured product or separate it from an OTC product. The market is part of the OTC market, but goes beyond the traditional set of OTC products. It includes equity-linked debt investments, but is mostly identified with a “wrapper,” which is a legal structure that houses the product by which it is sold to the public. The most common of structures are transferable securities such as a note or a unit in a fund such as an equity certificate. These products are often issued by a Special Purpose Vehicle (SPV) that is created specifically to sell the product to the public. The SPV will hold assets that are part of the product and obtain the necessary credit rating to meet the needs of its investors. Structured products are commonly issued to investors by financial institutions. Another differentiating factor for structured products versus OTC products is that some products embed an actively managed portfolio while others have principal protection guarantees. Thus, structured products can be created to enhance returns or manage specific risks. The first structures emerging from the OTC market were equity linked debt products. The wrapper is a note or a bond and the product embeds a derivative structure that can limit downside exposure, cap the upside, offer coupon payments, or include an exotic option like a barrier or Asian option.