Structurers are adding features such as a guaranteed minimum exposure to the underlying and the elimination of a knock-out trigger to constant proportion portfolio insurance to boost investor interest. Some U.S. high-net-worth clients have ventured into CPPI deals because of the features, officials said.
The structures combine CPPI with another traditional capital protection technique, a zero-coupon bond plus a call option. The underlying of the option is the CPPI portfolio and so investors are not directly invested in the underlying asset, explained Yoshiki Ohmura, v.p. and head of alternative risk trading with Bank Julius Baer in Zurich. He said structurers can add more features when CPPI is option-based because the seller is able to delta hedge the option. But he noted most of the tweaks are to make the investor more comfortable with the product, rather than adding value to the deal. "The bells and whistles these products have are for psychological reasons," he noted.
