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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. |
In yesterday's note, we started a multi-part series delving into structured investment products. We're beginning with the basics and will progressively explore more intricate details as we proceed. Today, let's examine a few common examples of structured products and unveil some unique offerings that you may not have been aware of.
Major Structured Investment Products
1. Structured Notes:
- These bonds, combined with derivatives, provide customized payoffs linked to the performance of various indexes or assets, often enhanced by options.
2. Equity-Linked Notes (ELNs):
- ELNs deliver returns based on a single stock, a basket of stocks, or an equity index, offering equity market exposure with the potential for reduced risk or increased yield.
3. Principal Protected Notes (PPNs):
- PPNs guarantee the principal amount at maturity plus potential higher returns from exposure to underlying assets or derivatives.
4. Market-Linked CDs:
- These certificates of deposit link returns to a market index while protecting the principal, similar to traditional CDs, but with variable interest based on market performance.
5. Auto-Callable Notes:
- Linked to stocks or indexes, these notes can mature early if the underlying asset meets specified performance criteria. They typically offer higher coupon payments than standard fixed-income products.
Esoteric and Interesting Structured Investment Products
1. Commodity-Linked Notes:
- These provide returns based on commodities like oil or gold, allowing investment exposure without direct physical or futures investments.
2. Barrier Notes:
- Returns from these notes depend on the underlying asset not crossing a set price barrier; if breached, returns can diminish significantly.
3. Quantum Index Notes:
- Linked to a custom index that may include a mix of equities and commodities, these notes can have unpredictable performance due to their reliance on complex algorithms.
4. Range Accrual Notes:
- These interest-bearing notes accrue interest only on days the underlying index or rate stays within a pre-set range, highly dependent on market stability.
5. Inflation-Indexed Structured Repacks:
- Designed to shield investors from inflation, these products' returns are tied to an inflation index, such as the CPI, providing a hedge against inflationary trends.
There are even cat bonds, which are bonds that transfer the risk of natural disasters or catastrophic events from insurers/reinsurers to capital market investors. You name it, it’s available. Tomorrow, we will start unpacking individual instruments and the mechanics behind each instrument, including risks, breaking points, and application in a portfolio.
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Learn more about the Market Situation Report written by Tier 1 Alpha. |
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