In a period such as the current one, where there are high levels of uncertainty with a latent recession, investors are searching for financial instruments that provide above-average returns but with protection against market volatility.
At the end of January of this year, inflation stood at an annual rate of 6.4%, higher than expected and only slightly below the previous month’s rate, 6.5%, which confirms the slowdown in the rise of prices. However, not at the desired rate, so the Federal Reserve has yet to rule out the possibility of continuing to raise rates. Nonetheless, this may be lower since continuing to push with moderate levels could trigger the U.S. to enter a recession.
According to the U.S. Securities and Exchange Commission (SEC), structured notes are securities issued by financial institutions whose returns are based on, among other things, equity indexes, a single equity security, a basket of equity securities, interest rates, commodities, and/or foreign currencies. Thus, your return is “linked” to the performance of a reference asset or index. Structured notes have a fixed maturity and include two components – a bond component and an embedded derivative.
Structured notes were introduced in the United States in the early 1980s and gained notoriety in the mid-1990s as a result of the crisis generated in the fixed-income markets during 1994, when the Fed raised interest rates by 250 basis points, generating heavy losses for fund managers with positions in structured notes issued by agencies.
According to a report by The Wall Street Journal, around US$73 billion in structured notes had been issued in the U.S. as of November of last year, getting very close to the record of US$100 billion in 2021.
According to Monex, structured products are generally created to meet specific investor needs that cannot be met with standardized financial instruments available in the markets.
Typically, structured notes are used by different market participants as:
– an alternative to direct investment
– a part of the overall asset allocation
– a risk reduction strategy in a portfolio
Just as stocks and bonds serve as essential components in the foundation of a well-diversified portfolio, structured note investments can be added to an investor’s portfolio to address a particular objective within an investment plan.
During periods of inflation, investors are turning to structured notes as a financial instrument to obtain above-average results thanks to the combination of elements of both fixed and variable investments, i.e., if used correctly, this instrument can offer specific protection against a downfall in the assets in which it invests.
For the above reasons, using structured products as investment vehicles provides a possible system for regulating risk exposure, making it possible to adapt it to the investor’s profile, considering their profitability objectives.
An investment vehicle is a mechanism by which investors obtain returns; structured notes can be cataloged as one since they are hybrid investment instruments that allow the design of a tailor-made portfolio, which can have guaranteed capital.
Some specialists believe structured notes in uncertain conditions can improve the risk-return ratio since they can encompass many assets. This instrument also facilitates access to specific markets or financial assets that do not have sufficient transparency, liquidity, or accessibility.
How to do it in 5 simple steps:
At FlexFunds, we are specialists in the setup and issuance of investment vehicles through exchange-listed products (ETPs), for which we have designed a 5-step process that simplifies it:
Step 1. Customized assessment and design of the ETP:
A detailed study and data collection of the desired investment strategy is carried out.
Step 2. Due diligence and signing of the engagement letter:
Once the product structure is defined, the client’s due diligence is performed, and the process continues with signing the engagement letter.
Step 3. ETP structuring:
The portfolio manager’s onboarding is performed in this step, and the essential documents, such as the “series memorandum,” are reviewed.
Step 4. Issuance and listing of the ETP:
The investment strategy is repackaged as a bankable asset thanks to generating an ISIN code that facilitates its distribution.
Step 5. The ETP is ready for trading through Euroclear:
Investors can access the ETP through their existing brokerage accounts from many custodians and private banking platforms.
Thanks to the features of instruments such as structured notes, FlexFunds can offer innovative, customized solutions that can allow you to diversify your investment portfolio and facilitate access to international investors.
Emilio Veiga Gil, Executive Vice President, FlexFunds 
Por Gabriela Huerta