Private bankers are buying an increasing number of structured products linked to currency movements in a bid to provide more attractive yields to their clients."It has become a large portion of our business," said Philip Bastiman, London-based global head of customised products at private bank Coutts. "Over the past few years, it’s been difficult to give clients good returns from many equity-linked structured products. But we’ve found that there have been opportunities to get good returns in currency markets, because there is some degree of volatility," he added.
This view is shared by others in the industry: "In past years, the structured product business was done on equity- and bond-linked notes, then came hedge funds, and now in the last six months or so, we’ve started doing currency structures," said Alex Keil, senior investment adviser at Barclays Private Bank. "There is very fast growth at the moment because now, both bankers and clients are aware of what there is available and the yields that are possible," he added.
With possible returns of 12% on some types of note, these products have a definite attraction. "A structured deposit is the primary strategy that the more sophisticated private bankers are recommending to their clients," said Keith Styrcula, chairman of the Structured Products Association and senior marketer of equity structured products at JP Morgan Chase in New York.
He said private bankers and wealth managers prefer the idea of using structured products for currency exposure as opposed to the OTC currency derivatives markets. "Risky speculation in the derivatives markets can be achieved by going to an institutional FX desk and buying a forward or an option on the currency. Structured investments can be a more prudent way to take a market view on currency fluctuations," he said.
These concerns are particularly relevant in the US, where the trading activities of Henryk de Kwiatkowski still resonate. De Kwiatkowski, a private investor, lost $215 million over a four- to five-month period in the mid 1990s. At one point, his long dollar futures positions were worth 30% of the total open interest in some Chicago Mercantile Exchange currency contracts.
De Kwiatkowski then sued Bear Stearns, his broker, for negligence, failure to warn him of the risks and not keeping him appraised of market forecasts. He originally won $164 million in damages, but the verdict was overturned on appeal by Bear Stearns, which successfully claimed it was not its duty to provide unsolicited advice to non-discretionary clients.
More on Structured Products
Controversial tax reforms would foist “unworkable” compliance burdens on firms
Product aims to improve on PowerShares S&P 500 Low Volatility Portfolio ETF using risk reduction
Conditional income product offers steady income and could offset potential bear market losses
Product offers 17% maximum return but investors’ capital is protected
Sign up for Risk.net email alerts
Sanjay Sharma talks about risk transparency and how his book helps achieve it.
A five-minute formula from Alexander Denev that takes you through a simple probabilistic graphical model and explains how and why these are used. Find out more about the ground-breaking book, Probabilistic...
Industry leader Vincent Kaminski discusses the challenges faced by energy markets and his new book, Managing Energy Price Risk, 4th Edition.
Momtchil Pojarliev talks about his book, The Role of Currency in Institutional Portolios, currency investing and the potential role of currencies in institutional portfolios.
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.