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Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here. |
We are starting a new series of bonus content focused on structured investment products. What are they, what’s the use case, and how are they structured? Today, we will start with the basics, and in future editions, we will dig into individual products and see what we can learn. We hope you enjoy this multi-part series.
Structured investment products are hybrid securities that combine elements of traditional investments like bonds or stocks with derivative components like options or swaps. They allow customization of risk/return profiles to meet specific investment objectives.
The key use cases are:
- Customization to align with goals, risk appetite, and market views
- Risk management by providing principal protection or capping downside
- Yield enhancement by allowing upside participation with derivative overlays
- Portfolio diversification by accessing alternative asset classes/strategies
- Tax efficiency in some cases
"Structuring" involves packaging the different components together. A common structure is a principal-protected note linked to an underlying asset's performance, with embedded options determining participation in price movements.
As we mentioned at the top, today, we'll cover the basics. In future editions, we'll dig into specific structured products like reverse convertibles, auto-callables, and others to understand how they work, potential risks/rewards, and how they can influence market behavior.
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Learn more about the Market Situation Report written by Tier 1 Alpha. |
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