Structured Products and Alternative Investments

Internationally, private investors have been using structured products to gain access to alternative investments for a number of years now. Increasing interest has arisen after the extended period of market volatility and lack of credit facilities available since mid-2008. Structured products can be a convenient way for private investors to access alternative investments for the following reasons:

1. Regulation: Many private investors are often not permitted to invest directly in unregulated asset classes like hedge funds, private equity, currencies, commodities etc. By wrapping such unregulated asset classes and investment strategies in a structured product, they can be brought into the regulated environment and can be made available to a wider private investor audience.

2. Taxation: A direct investment in some alternative investments can be tax inefficient for some investors. Wrapping such investment strategies in a structured product cleanses investment return payments from a tax point of view ensuring that they benefit from the same gross taxation treatment as the returns generating by other lump sum investments.

3. Administration: Wrapping a particular investment strategy in a structured product can prove to be more administratively efficient from a private investors’ point of view. Eliminating the requirement to make annual tax returns, to take ongoing investment decisions or to vote or attend an AGM is often viewed as a significant advantage.

4. Scale: Some investment strategies are only available to investors who are willing to invest very large initial amounts (e.g. Private Equity requiring $10m or more). By pooling the resources of a number of private investors into a single structured product, these products can also gain access to leading investment strategies with normally prohibitively high minimum investment amounts.

5. Capital Guarantees: Through a structured product, investors with low risk appetites can invest in asset classes with significant return potential that otherwise would be too volatile for this type of investor. Capital guarantees also assist investors with medium or higher risk appetites to invest in exotic or volatile asset classes with a greater degree of comfort, knowing that the downside has been reduced or eliminated.