Many years ago the retail investment business was a place where asset managers devised portfolios for their clients within a defined range of high-quality debt and equity instruments.
One innovation that changed the portfolios is the investment class broadly known as structured products.
Structured products offer retail investors easy access to derivatives.
Structured products are designed to facilitate customized risk-return objectives.
This is accomplished by taking a traditional security, such as a bond, and replacing the usual payment features (e.g. periodic coupons and final principal) with non-traditional payoffs derived not from the issuer’s own cash flow, but from the performance of one or more underlying assets.
The payoffs from these performance outcomes are contingent in the sense that if the underlying assets return “X,” then the structured product pays out “Y.”
This means that structured products closely relate to traditional models of option pricing, though they may also contain other derivative types such as swaps, forwards and futures, as well as embedded features such as leveraged upside participation or downside buffers.
Structured products are frequently offered as SEC-registered products, which mean they are accessible to retail investors in the same way as stocks, bonds, exchange traded funds (ETFs) and mutual funds.
Their ability to offer customized exposure, including to otherwise hard-to-reach asset classes and subclasses, makes structured products useful as a complement to these other traditional components of diversified portfolios.