13 Nov 2012, Richard Jory, Structured Products
Credit Suisse has expanded its share of a structured funds market in Europe that has been as damaged as any other by the financial crisis. A firm commitment, in terms of people, financing and innovative ideas has ensured that the Swiss bank has maintained its leading status.
This year's extras include more foreign exchange solutions in the financing that the bank has offered, a larger financing book and the provision of more tail hedges for funds of funds, which have relied less on hedge funds in their own portfolios to provide that protection. "We have also looked at cash management solutions, trying to provide the funds of funds with liquid and transparent strategies to invest in, on the basis that it does not provide lock-ups and the infrequent liquidity that funds of funds are susceptible to when they invest in hedge funds directly," says Cameron Hedger, managing director in fund-linked products at Credit Suisse in London.
"Their service is outstanding and they meet our bespoke requirements in a timely and pragmatic way," says an alternative asset manager based in Switzerland. "This year, they have allowed us to restructure some older products in a way that allows us to substantially reduce running costs, both from an internal as well as from an investor point of view.
The bank has also further developed its Zurich-based market-making, through which it takes large positions in hedge funds to support alternative investment products that have been issued and distributed through its private bank and asset management networks. "In times of uncertainty, that involves buying back more positions and holding inventory, because investors are looking for an exit that is more timely or frequent than that achieved by dealing with the underlying manager directly," he says.
Innovation came in the form of adjustments to products done with Man Investments and German distributor Apano, which overcame the sensitivity that protected products have to interest rate rises. The change came in the ninth issue of capital-protected notes exposed to Man Investment's AHL managed futures programme. "Normally, principal-protected products have the wrong duration and the wrong sensitivity to interest rates, because if the rates increase, the value of your product goes down over time," says Walter Cegarra, head of EMEA product management origination for flow-linked products at Credit Suisse in London. "We found a way to remove that, so that if interest rates go up, the value of the notes will not fall, but will also rise."
The innovation resulted from a discussion between the distributor, Man in Germany and the bank. "After nine launches, those discussions are quite fluid," says Cegarra. Traditional structured products have a zero-coupon bond plus an exposure to a leveraged investment, where the zero is the present value of protection today. Its value will go down if rates go up. The solution that Credit Suisse came up with was to keep the cash in cash-yielding, money market instruments instead of buying a zero. "Then your cash part has a positive sensitivity to rates," notes Cegarra. "You do it as a Credit Suisse note but you just change the way you hedge your interest rates. Instead of buying the zero coupon upfront, which creates a sensitivity, you monitor the value, like in a constant proportion portfolio insurance note."
The technique requires that the Swiss bank takes money market risk, says Cegarra. "If your money market instruments go to a yield of zero, you will never generate the return for your protection to go back to 100 at maturity. So we need to put on a contingent hedge between interest rates and the value of the hedge fund allocation."
The bank's other leading products for the year are based around asset allocation, including protected notes linked to a basket of asset allocation funds. "We have been surprisingly successful in helping investors in the Benelux region invest in principal-protected notes linked to external asset allocation managers, namely Carmignac Patrimoine and Ethna Aktiv E," says Cegarra.
The bank has done a series of similar products in the Benelux region with a range of distributors, mainly private banks and insurance companies. The products are fully protected, giving 100% participation at maturity. "The one twist, when working with one of the insurance companies, was an additional constraint of capital requirement under Solvency II," says Cegarra. "We delivered the transaction in a way to minimise counterparty risk and the capital requirement."
According to Hedger, more than €100 million was raised in these products, the vast majority of which were sold in Belgium.
Stimulated by a request from a Middle East institutional client, Credit Suisse has also worked on extending that firm's interest in the Raii Holt Index, which the bank introduced in 2010. After gauging sentiment in the market, the bank combined the index with its Holt strategy overlay and created a sharia-compliant allocation strategy. "It is intended to be an ongoing offering with a target of well in excess of $100 million in the first 12 months," says Hedger.