A Trillion Dollar Market You Have Not Heard Of
Primer on the Global Structured Products Market in 2022
Introduction
You’ve probably heard of stocks, bonds, and or ETFs. These asset classes and financial instruments are well known and you may have bought them through your broker or financial advisor for your own portfolio. In particular, ETFs has risen to the spotlight over the past decade with their lower fees and appeal of exposure to a wide variety of markets through a simple-to-purchase product. It is estimated that ETFs Assets Under Management (AUM) has reached a total of $6-7 trillion in 2022 and are expected to increase to $12-16 trillion by 2027.
If you think that is impressive, then structured products market is even more so. Structured products market is estimated to be 50% bigger than ETFs. Yet most people have not heard of structured products before.
We covered what structured products are in a previous post:
Now let’s dive deeper into the structured products market.
Who Buys Structured Products
If you have a private banker, it is likely you’ve been offered to buy a structured product before.
The primary buyers of structured products are sophisticated investors. This includes high net worth individuals (HNWIs), family offices, and institutions such as hedge funds, pension funds, and insurance companies. These investors typically possess a greater understanding of complex financial markets and have specific risk-return objectives that conventional financial instruments can't satisfy.
HNWIs and family offices might use structured products to access unique investment strategies or to provide a level of capital protection. On the other hand, institutions may use them for more complex purposes, like hedging certain exposures or implementing nuanced views on various markets.
Who Sells Structured Products
Traditionally, structured products have been created and sold by large investment banks. Banks like J.P. Morgan, Goldman Sachs, UBS, and Barclays have specific divisions such as the structuring desk dedicated to creating these complex products. These institutions possess the necessary infrastructure, financial engineering expertise, and regulatory know-how to design, create, and manage these products.
These products are typically issued as senior obligations of financial institutions, which puts them on par with bank deposits, but they typically don't have the deposit guarantee of a federal institution such as the FDIC.
However, with the recent rise of fintech, boutique asset and wealth management firms have begun to enter the space. Leveraging technology such as Fig Investment’s platform, these smaller firms are now able to provide structured products to their clients, although the breadth and complexity of their offerings may still lag behind larger institutions.
Market Size & Transaction Volume
The structured product market is colossal, with an estimated value of around $11 trillion worldwide. This makes it significantly larger than the ETF market, which boasts a considerable $6-7 trillion in AUM.
For transaction volumes, it's important to note that, unlike more liquid markets like equities or bonds, structured products are often bespoke and traded over-the-counter (OTC). This means transaction volumes can fluctuate significantly and are generally not publicly disclosed.
Standardized structured products are traded on Euronext’s Structured Products Exchange. As of May 2023, over €600B of structured products are traded on a trailing monthly basis on Euronext alone.
Product Types
There's a vast range of structured products, each tailored to meet specific investor needs. Some common types include:
Capital Protection Notes: Debt securities issued by financial institutions that offer a return based on the performance of underlying assets.
Participation Notes: Debt securities with a return linked to the performance of an underlying asset. These are often capital-protected.
Yield Enhancement Notes: Notes that typically provide a synthetic yield by selling option on an underlying asset.
Leverage Products: This is a structured note that provides a multiplied return based on the change in an underlying asset's price. However, the note may also contain conditions that could lead to significant losses if the asset's price moves in the opposite direction.
These products can be linked to a single asset, multiple assets, or various indices. More complex structures might be tied to a combination of equities, commodities, interest rates, foreign exchange rates, or cryptocurrencies.
Regulatory Landscape
The regulation of structured products is complex and varies by country. For instance, in the U.S., structured products fall under the jurisdiction of the SEC and FINRA. The regulations cover areas like product creation, marketing, sales practices, and risk disclosure.
In the European Union, structured products are regulated by the European Securities and Markets Authority (ESMA), under the framework of MiFID II and the PRIIPs Regulation. These regulations require manufacturers to provide investors with a Key Information Document (KID) highlighting the risks, rewards, and costs associated with the product.
Conclusion
While complex and challenging, the structured product market provides a wealth of opportunities for savvy investors looking for tailored risk-return profiles. With continuous technological advances and regulatory developments, we can anticipate greater accessibility, transparency, and comprehensibility in this market. These developments will not only benefit sophisticated investors but may also open the door for a broader range of investors to consider structured products as part of their diversified investment portfolios.
Remember that none of the information presented on this letter and blog are investment advice or solicitation of any kind. Fig Investments currently is not offering any investment products. You should do your independent due diligence before investing money into any asset. Please see Fig Investments’ disclosures here.