Structured products combine the risk/return characteristics of
different financial instruments.
There are usually two elements to a structured investment:
- An element of capital protection, usually a bond
product.
- An 'at risk' element' (called an alpha generator) which
provides the high performance potential. This can be any
financial instrument - a stock, an index, currencies or
commodities
Basically, the bond element sets the time horizon and the level
of capital protection offered by the product. The alpha
generator provides the enhanced performance potential.
A lower risk, 'defensive' structured product will allocate the
majority of the investor's capital to the bond element. A
higher risk, 'aggressive' product will use derivatives to
increase the extent of alpha exposure.
The endless combinations of fixed income instruments and alpha
generators mean that the structured product market is highly
diverse. However, most products are a variation on a single
theme, the zero-coupon strategy.
