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STRUCTURED FUNDS

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Definition

Structured asset management might be seen, firstly, as a style of management whereby the asset manager offers a guaranteed return or at least a minimum return.

Unlike traditional asset management, in which the asset manager has only a best efforts obligation, the structured asset manager in effect guarantees a return. It usually counter guarantees this with a bank.

Whereas with a traditional investment fund, the asset manager prioritises its management expertise, the structured asset manager may, more prosaically, guarantee a specific, verifiable result.

Its guarantee is sometimes known as a formula and hence structured funds are known as formula funds.

The formula depends on market parameters. It might, for example be: Initial NAV x 100% +100% of the increase in the CAC40.

Structured asset management is not necessarily guaranteed or protected. Structured asset management originated from the quest to reconcile performance with a capital guarantee but, in time, it diversifed into a range of structures which don’t all guarantee the capital invested.

It is a so-called "passive" form of investment that enables investors to control the risks they are exposed to no matter what the underlying, while exploiting all available resources from day one of the investment in order to optimise the final return.

Structured asset managemement can also provide additional diversification (positions on parameters other than the underlyings) and possible arbitrages.

There are two major types of structured asset management depending on the financial techniques used:

Formula-based management

Formula-based funds allow investors to combine exposure to an underlying asset and guaranteed income or capital on expiry together with maximum flexibility.
This return is achieved by using derivative instruments "that aim to deliver conditional performance by a predefined strike date based on the performance of an index, a basket of indices or assets, or a combination of these indices or assets.
This guaranteed performance (the "formula") is also the object of a guarantee provided by a third party, whereby the fund manager may not invest in its own funds on behalf of the investor" (as defined by AMF, the French financial markets regulatory authority).

Building on this basic structure, there are various types of underlyings and types of structures. They consist of a trade matrix which combines the type of underlying used with the type of index used.
These new structures do not necessarily guarantee the capital invested on maturity.

Breakdown of the net asset value of a formula-based fund on launch and maturity

A component in risk-free assets
  • In order to guarantee the capital invested at maturity or regular revenue
  • The initial allocation depends on the level of interest rates
  • It gradually evolves to reach 100% of the initial NAV at maturity
A component in optional assets
  • In order to benefit from exposure to a chosen underlying and implement the strategy appropriate to expected market scenarios.
  • The initial allocation in optional assets corresponds to the cash payment
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Cushion management or CPPI and VolCap (VolTarget)

Portfolio insurance techniques have been around since the 1970s, namely in the form of stop loss and cushion methods such as CPPI (Constant Proportion Portfolio Insurance).

Objective:
The objective of the CPPI and VolCap methods is to limit the losses dwithin a portfolio. These techniques are based on a dynamic protection strategy.

How it works:

  • part of the capital is invested in no-risk assets
  • the other part is placed in risky assets (rate-based, equity-based, diversified UCITS, etc…)

Automatic regulations with regard to buying and selling are used based on parameters defined when the investment is first placed in order to adjust the exposure to risky and risk-free assets.

Overview of fund structures:

  • Capital guarantee or capital protection funds: you can choose between funds with a 100% capital guarantee or funds with capital protection. If you reduce the capital protection threshold, this enhances the performance driver of the fund, allowing you to create more dynamic investments.
  • Formula-based funds directional, with downside protection features or mixed
  • Capitalised/distribution funds
    The performance of the vast majority of structured funds is not determined until maturity. There are also funds that distribute annual coupons. You are responsible for setting the tone of your investments and defining the market in which you wish to invest.

The perfect complement to other management methods

The attraction of structured management lies in its ability to:

  • Provide a risk/return profile tailored precisely to investors' needs and expectations
  • Address specific investment issues
  • Diversify a traditional asset portfolio

Depending on investors or distributors' individual requirements, it can also be used to:
  • Guarantee capital on maturity
  • Reduce volatility and extreme risk
  • Improve return distribution
    It is thus an ideal complement to other management methods.

Target investors

Structured asset management is primarily geared towards institutional investors and distribution networks (banks, insurance companies, independent financial advisors, etc.)and Private Banks.

Origin of structured asset management

The first structured asset management products were created by Société Générale in the 1980s in order to respond to the needs of investors who wished to optimise their risk/return ratio.

Lyxor AM was the first asset management company to specialise in structured funds and to this day has remained the leader in the field, offering one of the largest selections of formula-based funds in the market.

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