Betting on stability

Hedge fund-linked stability notes - structured products that allow high-net-worth investors to bet against fund implosions - are finding favour among several investment banks keen to reduce their exposure to extreme events in the hedge fund space. Hardeep Dhillon explores the issues

Stability notes, also known as market default obligations, have been steadily growing as investment vehicles for the past few years, with most transactions largely structured on classic liquid underlyings such as the Standard & Poor's or Eurostoxx equity indexes. These equity-based notes experienced a surge in popularity between 2004 and 2005, as they provided investors with a payout in the region of 150-200 basis points above Libor. Transactions contained leverage of up to 10 times.


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