Structured Products: What They Are and Why They Matter
We live in extraordinary times.
I grew up in the dot-com era. Living through up and downs of various technology hype and death cycles, it never ceased to amaze me how far we have come since the dial up days and the 1.4MB floppy disks that can barely store a picture taken by an iPhone today. Surely many expectations didn’t match reality. Looking through the narrative cycles, we have seen an improved standard of living and higher productivity as a society. Within our company, we see a whopping 50%+ YOY improvement in development productivity across all of our engineers thanks to LLMs and various structural technology improvements. We came a long way from askjeeves.
How does technology fit in with finance? In the ever-evolving landscape of 21st-century investing, traditional approaches are continuously being reshaped. One key player driving this transformation is structured products. Back in 2019, Bloomberg estimates that the total structured products market exceed $7 trillion, which is bigger than ETFs ($5.3 trillion) and total hedge fund market ($2.9 trillion). Yet, many investors are still not entirely familiar with their function and importance in contemporary investment approaches. Let's unlock the mystery.
Structured Products: A Primer
At their core, structured products are pre-packaged investment strategies combining traditional securities such as bonds with more complex instruments known as derivatives (options, futures, etc.). These financial hybrids are designed with the intent to achieve specific risk-return objectives, often tailor-made to suit an investor's unique risk appetite and market outlook. While they may appear intimidating initially, these instruments can offer a unique pathway to enhance returns, manage risks, and diversify investment portfolios.
Why Structured Products Matter
Structured products offer several benefits for the savvy investor:
Enhanced Returns: With the strategic integration of derivatives, structured products can outperform traditional investment instruments under certain market conditions.
Risk Diversification: The unique blend of assets that constitute a structured product enables investors to distribute their risk, providing a buffer against market volatility.
Access to Diverse Markets: Structured products can open doors to markets or asset classes typically inaccessible to individual investors.
Technology: A Catalyst for Structured Products
Traditionally when one goes to a financial advisor, either in person or online, they are presented with pre-made off-the-shelf products. Their advisor would walk them through their return objective and risk tolerance and then the customer is expected to choose between those presented products after signing a stack of paperwork. In this digital age, we expect more. More customization, more return - all the while cheaper and faster.
“More” - Josh Brolin as Bretton James in Wall Street: Money Never Sleeps
Technology is quietly transforming the world of investing, and structured products is an integral part of it. First, it has democratized access to these financial instruments, which were once the exclusive domain of seasoned and high net worth investors. Nowadays, platforms like Fig Investments exist to facilitate access to structured products and help decipher their complexities.
Second, technology has significantly expanded the customization possibilities of structured products. It's now feasible to design highly personalized financial instruments that cater to an investor's specific needs and risk tolerance. For example, through Fig Investment’s structuring engine, you can customize a structured product tailored to your goals within seconds instead of days. In addition, all composing instruments of a structured product is shown in real time, providing transparency and peace of mind for the investors.
However, it's vital to note that while structured products offer the potential for enhanced returns and diversified risk, they also carry inherent complexities and risks. Professional advice is indispensable before delving into this sphere of investing.
Final Thoughts
Structured products have emerged as a crucial component in the toolkit of the modern investor. Thanks to advancements in technology, these instruments have become more accessible and customizable than ever before. By understanding their function and importance, you can leverage their potential to optimize your investment portfolio. At Fig Investments, we are more excited than ever to merge technology and finance to bring you the next generation of investment products.
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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.