Demand grows for structured notes

CAIS Group, a distribution platform for alternatives, cites 40% increase in its structured notes business over the last couple of years

Jun 6, 2018 @ 3:46 pm

By Bruce Kelly

Financial advisers recently have grown more interested in structured notes, a type of debt with a return linked to the performance of a single security, an index of stocks or other investments, according to one executive from a leading distribution platform for alternative investments that's used by 5,000 advisers.

"I can share with you what our clients are doing right now in a really big-time way," Tim Shannon, president and chief operating officer of CAIS Group, said Wednesday morning on a panel about alternative investments at the Pershing Insite conference in Orlando, Fla.

Investment advisers, wary of rising interest rates, high stock valuations and the recent volatility in the broad market, increasingly are looking to buy a specific position for their clients, he said. And the way advisers are doing that "in an increasing fashion with us is purchasing structured notes," Mr. Shannon said.

He added that CAIS' business in structured notes had grown by 40% over the past couple of years but did not give any more details.

Wall Street banks underwrite structured notes, which can be volatile because they are a hybrid of a bond and a derivative. Some notes have principal protection but others don't, and investors can lose a portion or all of their principal based on the terms of the note and market volatility.

"While structured notes may enable individual retail investors to participate in investment strategies that are not typically offered to them, these products can be very complex and have significant investment risks," according to a Securities and Exchange Commission bulletin to investors from 2015. "Before investing in structured notes, you should understand how the notes work and carefully consider their risks."

CAIS, which was launched in 2009, has $6 billion in adviser assets and 30 different alternative products on its platform, Mr. Shannon said. It uses Mercer for due diligence of those products.

The firm focuses on registered investment advisers and regional and independent broker-dealers, which Mr. Shannon said together control $9 trillion of retail and wealth management client assets. That roughly matches the amount of the same type of assets at the largest Wall Street institutions.

Advisers are seeking structured notes that have specific features, including amounts of leverage and downside protection for investors, Mr. Shannon said.

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