A product that only an investment bank could deliver, the Equinox Trust gives exposure to a ‘reference portfolio’ of hedge funds, mitigated by a ‘Threshold Management’ mechanism which permits leverage of up to 130 per cent if positive returns persist, or shifts exposure to cash if the underlying hedge funds are underperforming. The day beforehand, May 31, UBS had gotten in on the act, offering a rising or falling guarantee (a Constant Proportion Portfolio Technique note, if you ask them) over a Rubicon global fund of hedge funds. May 29, another day and another investment banking risk management technique was on display in an Aegis report. This time it was JPMorgan, offering 90 per cent capital protection over a basket of emerging market indices in an Ord Minnett-distributed STRIPES offering. Retail investors nervous about riding the emerging markets rollercoaster are calmed by JPMorgan’s averaging methodology, which references capital growth to the averaged growth of the indices basket in the last two years of the five year vehicle. One only need go back a further two weeks, to May 16, for the previous investment bank structured product – Citigroup Global Capital Market’s Asian Income Plus fund, which truly gives the lie to any notion that the retail market is uncomplicated.
The fund is actually an offer to buy into Citigroup’s third tranche of Yield Income Enhanced Listed Deferred Securities, under a ‘deferred purchase agreement’ where the final price is determined by six years’ performance of a buy-write strategy over 30 stocks from the MSCI Asia Index. Income is derived from call option premiums and any dividends paid from the underlying basket and an exit strategy is covered by a capital guarantee and a Citigroup pledge to make a market for the securities. So in a period of less than twenty business days, just about every major investment bank had emerged with a structured product, displaying a dizzying array of risk management techniques, all aimed at delivering a relatively predictable rate of return with limited downside risk.
This pace and diversity of product release has now become typical, as Australians become more comfortable with derivatives and financial engineering. The number of options trading accounts lodged with the ASX is at record levels, the number of listed warrant instalments has ballooned from about 1000 in 2001/02 to about 4000 today. Ordinary Australians, along with the ordinary Dutch, are the only retail investors in the world able to access collateralised debt obligations. Given that these same Australians are all members of superannuation funds, and these same funds are becoming known for their alternative asset appetites, it was only a matter of time before the investment banks cast their eyes above the now-saturated retail structured product market, and began wondering how they could access the wholesale billions. …and now for the institutions It will surprise no-one to learn that Macquarie Bank’s Equity Markets Group is among those investment bankers scouting for opportunities in the wholesale market.