What fees are included in the structured products you are buying? July 18, 2014 - 16:12
It’s a simple question but not many people will give you a
simple answer. Cube hopes to bring clarity to all the investments we work with
and so we will always be candid and clear as to what fees we charge.
When we are developing and originating products for clients
we will also declare what our fees are and there will be no hidden extras.
Depending on the size and complexity of investments these could range from
0.25% - 1.25%.
But what about the
issuers, what are their fees?
Firstly, it’s worth remembering that when you invest in a
structured product you lend money to the issuer (usually a bank) and they promise
to pay you back that money alongside any gain or loss made by the product
strategy, an auto-callable, for example. So, although issuers tend to hedge
their liabilities with assets like bonds and derivatives, they needn’t do so.
if the day you buy your product all the staff in the middle office of issuer falls
asleep for five years, then when your product comes to maturity, so long as the
issuer is still there, then you will still be paid.
Of course, what usually happens is that issuers hedge out
the expected liabilities of structured products with assets, usually bonds and
derivatives. The bank’s profit is the difference
between the cost of those assets (fair value) and the price show an investor to
buy or sell (bid/offer).
CUBE: reducing the asymmetry
As part of its service Cube provides a host of robust and reliable
tools for investors to estimate and monitor the fair value of structured
products as well as a range of other useful metrics to enable you to answer
questions that affect your investment, from scenario testing to the Greeks.
CUBE is pleased to offer investors a range of tools to help them
search, select and monitor their structured investments:
- Fair value pricing – mark to market pricing
using premium market data
- Delta (how will the price of your product move
in relation to the underlying assets?)
- Vega (how will the price of your product move in
relations to volatility of its underlying assets?)
- Volatility of product pricing
- Volatility of returns
- Uniform backtesting
- Robust and repeatable simulations based on
- Default risk and credit quality monitoring
Oh, and by the way, in short, banks tell us they typically expect
to make a profit of between 0.25% and 2% on most structured products and we
think that they are correct. Mostly..
Simon has over 10 years’ structured investments experience, helping to develop the industry’s leading data and news service with senior roles in London and HK. He subsequently joined EFG Financial Products (Leonteq) before founding consultancy, Mu Capital. He writes and speaks extensively on structured investments, recently contributing the European chapter to Structured Products: Evolution and Analysis, published by Incisive Media.