Structured investments (in shares). What are they?

Discussion in 'Share Investing Strategies, Theories & Education' started by Invest_noob, 18th Jul, 2018.

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  1. Invest_noob

    Invest_noob Well-Known Member

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    Just wondering if anyone here has experience investing in structured investments. Someone at work invested in it recently and has been doing well.

    From what I understand, it works something like this:

    You invest say 32k, the investment company invests 200k on your behalf for 2 years. They buy a basket of the top 4 US shares and have hedged both ways. So if the shares go up, you get paid up to 16% on the 200k and if they go down, you still get paid. Your risk is limited to your initial investment and the the investment company has loan insurance for the rest of the 200k. If the value of the shares drop below 40% you lose PART of your capital. If they rise higher than 16%, you don't get paid the extra bit, your gain is capped at 16%. You can cash out at the end of any quarter if you're happy with the gains made.

    I may have not understood this correctly and this is just one of the many structured investments available. Does anyone have more information on these kind of products? Have you used them?
     
  2. Invest_noob

    Invest_noob Well-Known Member

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    Here is an article about it

    Why high-rise Harry loves structured investment products

    “I have four shares and if they don’t go below 65 per cent over the 12 months I get all my capital back plus 10 or 11 per cent interest,” he says. “In the 10 years I have been doing this I have only lost money once.”
     
  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    Two key sentences from that article:

    Structured products were popular before the GFC but waned after many of them failed when the market experienced massive losses.​

    Today, many wealth management companies create bespoke products for high net worth clients.
    Be very very careful of structured products - especially if leverage is involved. Quite often you lose all flexibility to exit the market when it no longer makes sense to be exposed to it.

    High net worth clients (ie Triguboff) can afford to allocate a percentage of their funds to more speculative / higher risk investments because it won't cause them any pain if they lose that money. For everyone else, I strongly recommend caution - be very mindful of your risk management strategy.

    I'm not surprised that structured products are starting to re-emerge now - it's been 10 years since the GFC and there's a whole heap of new investors who didn't live through that and have no experience to temper their (lack of) risk management.

    In my experience, structured products are all about locking investors into an inflexible investment which benefits the investment manager, not the investor.

    I'm talking in generalities here - not about the specific product alluded to in the article. I have no experience with that.
     
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  4. willair

    willair Well-Known Member Premium Member

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    “In the 10 years I have been doing this I have only lost money once.”

    All it takes is a standard deviation ,like what happened during the "CFC" ,and once is all you need..
     
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  5. oracle

    oracle Well-Known Member

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    One lesson investors should heed from the Oracle of Omaha involves leverage.

    "When leverage works, it magnifies your gains. Your spouse thinks you're clever, and your neighbors get envious," explained Buffett in his 2010 shareholder letter. "But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade — and some relearned in 2008 — any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people."

    Cheers,
    Oracle.
     
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  6. Invest_noob

    Invest_noob Well-Known Member

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    Ok, but the product I'm looking at may not involve that risk. The leverage is taken by the investment company and the client pays a couple of grand as insurance. The client's risk is limited to the initial deposit.
     
  7. Invest_noob

    Invest_noob Well-Known Member

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  8. oracle

    oracle Well-Known Member

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    Just ask yourself what can go wrong. What are they not telling you but is there somewhere in the fine print. If it is so easy to make double digit returns with worst case scenario of losing 35% capital there are trillions and trillions of dollars looking to make double digit investment returns. Why aren't everybody doing it?

    Cheers,
    Oracle.
     
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  9. PandS

    PandS Well-Known Member

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    Not as easy as it sound.

    Look like they take your money and buy and sell options with a set time frame.
    32K probably let you control options spread of 200K plus, no risk to them all risk to you
    they don't put 200K at risk, none of their money is involve, they just use your money to buy options to control 200K of asset

    risk:
    If the company structure this investment goes belly up, your money goes with it
    options risk (usually leverage) and time decade.

    Read up on options and warrants and you get an idea, I use options myself so I know a bit about it
     
    Last edited: 18th Jul, 2018
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  10. Simon Hampel

    Simon Hampel Founder Staff Member

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    Also - look carefully at how much the fund manager is making from your investments?

    Would you be better off simply holding the underlying shares and managing your own risk?

    If your upside is capped at 16%, you'd want to make damned sure you've protected your downside - otherwise, what's the point? Also - don't dismiss the worst case scenario. A lot of people made that mistake with their pre-GFC investments when the worst case scenario did indeed come to pass.
     
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  11. PandS

    PandS Well-Known Member

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    They capped the upside they probably use bull call spread options
     
  12. Invest_noob

    Invest_noob Well-Known Member

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    Thanks all, I'm not going to invest in anything I don't understand. Pretty risk averse myself.

    It just sounded attractive when my colleague mentioned that he made 8.5% cash on cash in 6 months and has cashed out (little greed). My colleague has known the investment company owner for a long time and says that he's very risk averse and started this investment set up for his dad when the banks slashed dividends a couple of years ago.

    Will thoroughly scan the pds
     
  13. willy1111

    willy1111 Well-Known Member

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    It has said how you make money if the shares go up or down...what happens if they go sideways?

    I'd say PandS is on the money, sounds like they are buying long dated put and call options.

    Research Put and Call options and you will find a similar risk reward payoff
     
  14. Invest_noob

    Invest_noob Well-Known Member

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    If the end value of the shares after 24 months hasn't changed at all(I don't see this ever happening), you just get your capital back.

    If end value of shares is positive, you get 16% x number of months held / 12 on top of your capital. You don't have to wait 24 months, the investment auto-redeems at the end of the quarter if positive.

    If end value after 24 months is below 0 and up to -8%, you just get your money back.

    If end value after 24 months is below -8% but not below -40%, you get your money back plus (percentage of fall) - 8% x (number of months) / 12. So if final value is down to -20% at the end of 24 months, you get (20%-8%) x 24/12
    = (12%) x 2
    =24% in 2 years plus initial capital.

    If end value is below -40%, you lose a portion of your initial capital. So for instance if the value drops to -50% and then recovers to -20% by the end of 24 months, you lose 20% of you initial capital and are returned 80% of your capital.

    So yes, the risk/drawbacks are:
    • If any of 4 shares does bad i.e. falls below -40% of the original purchase price in a quarter and the others do really well, you can't just redeem the investment at the end of the quarter. You have to stick out for 24 months or until all the shares are back positive at the end of a quarter.
    • No didvends
    • Forced to redeem at the end of 24 months even if the end result is a loss. However this hasn't happened thus far and most investments have been redeemed in less than a year.
    Rewards:
    • Possibility of 16% return pa.
    • Capital protection up to -40% value

    Apologies, I incorrectly mentioned leverage. There is no leverage involved in this investment. Minimum investment is $20k AUD and returns are in AUD.