Supertracking: Surfing the Tail RiskAugust 15, 2014 - 17:14
This article is neither an offer to sell, purchase or
subscribe for any investment nor a solicitation of such an offer.
Reducing volatility and lowering correlations to global indices are key concerns for investors who are looking to take risk off the table in preparation for what could be economic headwinds in the near-to medium term. Meanwhile, investors cannot afford to miss the next upward cycle when it does happen. The trouble is that investors are worried about switching too heavily into traditional bonds, which opens them up to whims and caprices of central banks.
With the Bank of
England continuing to behave like 'an unreliable boyfriend', it appears
that uncertainty is the only sure thing in the 'new normal
environment'. Cube is preparing to launch series of products
which help define risks for portfolio managers: reducing downside exposure to key markets while offering
opportunity to outperform if markets surprise on the upside.
DEFINING RISKS AND REWARDS
We have tested a number of ideas so far and the favorite has been a six-year tracker linked to the Eurostoxx50 (other indices are available) that offers a 60% European protection on the downside, protecting for falls in the index of up to 40% (the index is currently trading at around 3,000 so a protection is around 1900 a level not tested since the launch of the single currency). This iteration (version three, in green above) strikes at 85% and offers over 2.667 times the rise in the index, so if the index is down 5% in six years, the product will still return capital plus 26.6%.
You can see the other shapes we have been looking at in the table below:
| Cap (on index growth)
THANKS FOR LETTING US KNOW WHICH VERSION YOU PREFER AND WE WILL REPORT BACK NEXT WEEK!
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.