Conference Report: Securing success in Switzerland

The flourishing structured products market in Switzerland will continue so long as there is a friendly regulatory environment, according to many of those in attendance at last month's inaugural Structured Products Switzerland Conference. In the conference's keynote address, Arthur Vayloyan, head of investment services and products at Credit Suisse in Zurich, called on the structurers of derivative-based investments to continue to improve the quality and quantity of products on the market. "Despite the enormous growth rates we are seeing, I still believe the market is immature in terms of what can be achieved with structured products," he added.

Regulatory strife

Threats to innovation do exist, however, thanks to regulatory pressures. Most European market participants think that Switzerland has the most relaxed regulations of any structured products market. But Gerhard Niggli, Zurich-based partner at law firm Pestalozzi Lachenal Patry, gave a revealing presentation on the current state of the regulations in Switzerland.

On July 19, 2006, the Swiss parliament introduced the Draft Collective Investment Ordinance, which is due to be implemented in January 2007. According to the draft, a structured products provision will be written into the new Collective Investment Ordinance Act, said Niggli. Article 5 Structured Products will have two important effects. First, only supervised financial intermediaries with a presence in Switzerland will be able to publicly offer and distribute structured products in Switzerland. Second, public promotion of structured products will only be allowed if accompanied by a simplified prospectus.

The first point is problematic because there is no legal foundation for privileging financial intermediaries, and the requirement for a Swiss presence is incompatible with Switzerland's obligations under World Trade Organization agreements, Niggli said. Meanwhile, the simplified prospectus requirement creates problems because of the confusion surrounding what exactly constitutes a simplified prospectus. Nor are there guidelines on how the prospectus should look, or even who should devise a model simplified prospectus, he said.

While Niggli was confident that these problems can be solved, he did press upon the audience that it should not take the current regulatory environment for granted. The treatment of funds in Switzerland is still heavily regulated and the fear is that without pressure from the structured products market, similar restrictions in that area could hamper growth.

Fun with funds

It is true that the fund environment in Switzerland is the most hotly contested regulatory issue in the Swiss market. Also touching on the subject was Primin Stutzer of hedge fund manager Man Group, who felt that the meltdown of hedge funds such as Connecticut hedge fund Amaranth earlier this year received too much attention from the press and, in turn, regulators. In defence of hedge fund-linked structured products, he said: "Hedge fund-linked structures offer absolute returns, the ability to profit in both rising and falling markets and the ability to improve the returns and reduce risk of a traditional investment portfolio."

Stutzer also offered examples of recent structured hedge fund products. "The common structures are zero coupon plus levered exposure, constant proportion portfolio insurance and portable alpha," he said. The more recent hedge fund structures are exotic-option type of structures, including enhanced participation note (Eppic), target redemption notes (Altaris) and synthetic portfolio insurance (SPI), he said. Stutzer predicted that demand would increase for products with higher risk and increased accessibility to onshore markets. "A greater degree of innovation is expected, with a trend towards enhanced liquidity and a continued search for new forms of alpha," he added.

Also presenting on hedge funds, this time focusing purely on institutional investors, was Dirk Sohnholz, Zurich-based managing partner at Feri Institutional Advisors. The presentation covered the institutional investment strategy of hedge fund-based alpha overlay. "The portable alpha concepts intends to transport alpha to other basis portfolios, for example general investor portfolio, cash, bonds and equities," Sohnholz said. "As long as the alpha is higher in the long term than the risk-free return plus cost, this is an attractive concept for all portfolios and funds."

Private client focus

For the private bank clientele at the conference, Patrick Casters, Luxembourg-based senior vice president, head of PFS structuring at Dexia Private Banking, gave a talk called: "Asset Allocation for Structured Products in a Wealth Management Portfolio." Casters said that educating clients about the potential of structured products benefits both banks and clients. Dexia's success has been to enable clients to participate in the selection of the structures they are deploying into portfolios, he said. "Dexia has placed EUR500 million in structured products for 600 clients in the past year alone," he added.

Presenting from the perspective of asset managers was Yann Thomas, Paris-based director of structured products at Societe Generale Asset Management, Alternative Investments. Thomas presented on active management. "The rational for actively managed structured products is that they meet a need for flexibility, offer degrees of customisation for a client and assist in the search for outperformance," Thomas said. Actively managed structured products are arguably the future of asset management, he said. "All sorts of indexes, mutual funds and hedge funds can be used, including dynamic or customised indexes complying with specific investment strategies that can be created on demand," he added.

With Switzerland regarded as the home of private banking, it is no surprise that high-net-worth client portfolios provided the main focus for debate throughout the day. The overall impression from the conference was that, in the future, private clients will see an even greater range of products allocated to a higher proportion of total portfolio.