Fixed-Income Alpha through Structured Notes

Structured Notes are fixed-income securities which offer investors various levels of principal protection while allowing them to participate in the positive returns on more volatile asset classes. This presents an attractive solution for risk-adverse investors who want exposure to alternative assets. It is important for investors to understand that Structured Notes are usually senior unsecured debt obligations of the issuers. Investors rely on the credit worthiness of these issuers for the return of principal. Therefore, investors should only consider the purchase of a Structured Note from a highly-rated entity.

Structured products were first introduced in the U.S. more than 100 years ago. Traditionally, the convertible bond has been the most popular structured instrument by companies wanting to issue debt more cheaply. In exchange for the potential of a higher return (if underlying share value increased the bond converted to equity at a profit) investors would accept a lower fixed coupon. Over the years, investment banks have added features to this basic fixed-income convertible bond and the issuance of structured notes has quickly grown to over $50 billion per annum.

Structured Notes are usually issued as fixed-income securities (both registered and private placements) by highly rated investment banks and have maturities ranging from 3 to 10 years. These notes are designed for purchase and holding until the maturity date although most issuers provide a secondary market for early liquidation.

Key benefits of the Notes include the following:

Simplicity
Investors simply purchase notes that guarantee a return of principal at maturity along with the upside participation in an alternative asset (commodities, hedge funds, global equity indexes). The investor does not have to address the relative complexity of a self structured package of zero coupons with options.

Safety
These debt securities constitute a direct, unconditional, unsecured and unsubordinated obligation of the Issuer. The debt securities will rank pari passsu in liquidation with all other unconditional, unsecured, and unsubordinated debt obligations of the Issuer. The structured note Issuers are S&P/Moody’s rated (A, AA, or AAA) financial institutions which represent the highest quality of corporate debt issuers.

Alpha Exposure
Investors seeking alpha by including alternative assets and strategies to their portfolio can utilize structured products to capture performance generators with the added benefit of eliminating the downside risk.

Minimum Return Guarantee
In exchange for less upside potential, Structured Notes may incorporate a coupon linked to an interest rate or beta index (i.e. Lehman Agg). This provides a minimum rate of return at maturity in addition to the original principal and upside potential of the alternative asset.

Liquidity
Investment banks and broker dealer affiliates of Structured Note issuers usually maintain a secondary market for the Notes. This allows for liquidation of investment prior to maturity.

Flexibility
Notes are customized to suit individual client investment objectives.

Diversity
The absolute return generator of the note may be based on a variety of alternative strategies including commodity indexes, hedge funds, Foreign currencies, and domestic and foreign equity indexes.

Risk Disclosure

Investments in structured products involve counterparty credit risks and client losses may occur. Past performance of structured products is not indicative of their future performance. This material on structured products contains opinions of Roundstone regarding the benefits of structured product investing which may be subjective in nature.

Please see the full Risk Disclosure for a more detailed listing of the risks pertaining to Structured Products.