Financial institutions in the U.S. are getting in on a trend for derivative-based investments which pay out when equity indices or baskets of stocks tumble. Dealers said appetite from institutional investors has contributed to a jump in the size of note issuance from offerings of about USD10 million to some of over USD100 million since the summer.
Firms including UBS and Merrill Lynch have issued such notes for high-net-worth and retail investors in the last few months (DW, 7/14), and equity derivative houses across the Street have been opening up the offerings to pension fund managers and insurance companies. One structurer said his firm has also seen interest in the notes from mutual funds that are increasingly adding a short dimension to their portfolios in a bid to compete with long/short equity hedge funds.
There can be problems marketing the notes to retail, according to some officials, explaining why firms started pitching to institutional investors. "Investors have been told by their brokers that markets go up, historically," said one U.S. equity sales head. He noted while some retail accounts will buy equity downside notes as a form of portfolio protection, they are never going to attract the same interest as bullish equity investment structures.
