Malaysian investors hunt for hybrids

Hybrid structures are increasingly popular in Malaysia as investors look to keep the cost of hedging down and moving away from capital protected products

gary-frenklah
Garry Frenklah, Royal Bank of Scotland

Hybrid structures are proving popular with investors in Malaysia. The products mix little-correlated asset classes that are cheaper to hedge than conventional products based on a single asset class, and leave more money to spend on the option.

“Malaysia is one of a few countries in Asia where Lehman products were not sold in any significant volume, and where offshore notes could not be done,” says Garry Frenklah, head of South Asia sales for equity derivatives at Royal Bank of Scotland in Singapore. “Consequently, while the value of investors’ portfolios did suffer, they did not blow up. Business survived and Malaysian investors are very keen to explore new products and ideas.”

The hybrid structure has become popular in the low interest-rate environment, and enables creators to structure exotic options in a relatively inexpensive way owing to correlation effects. Because a hybrid product works by correlating the performance of one asset relying on the performance of another asset, or assets, the hedge can be precisely matched to underlying exposure at a lower cost.

“Correlation between asset classes is typically lower than correlation between underlyings from the same asset class. So options on a basket that has assets with relatively low correlation will be cheaper to buy than on a basket with higher correlated assets,” says Frenklah.

With investors more sensitive to market movements and trends, there is more demand for allocation across different asset classes, he adds. ”In the past, investors may have been happy to have asset allocation in just one or two asset classes, such as equities and real estate.

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