The CMA Group has issued a guaranteed note that uses a combination of constant proportion portfolio insurance (CPPI) and an options-based structure. The EUR135 million (USD143.4 million) note is linked to the Berklay Global Fund, which is a multi-strategy fund of hedge funds advised by CMA. The product has a 15-year maturity and pays a coupon of 2.4% annually and was sold to insurance groups, according to Alessandro Mauceri, ceo of a research subsidiary of CMA in Geneva.
Mauceri explained the firm decided to go with the novel structure because in a traditional CPPI note a fall in the value of the reference assets can mean all the cash is transferred to zero-coupon bonds leaving the investor without participation in any future rebound of the hedge fund portfolio. In the product, the fund manager purchases a zero coupon bond with one half of the net asset value of the fund--so the reference value is 50--and then leverages the differences of those values by a multiple of four to purchase the option and provide the coupon. The option provides the investor with 60% of the upside of the fund of hedge funds.
Because the structure has locked in interest rates, the reference level only rises 3% per year, Mauceri said. This means that the maximum leverage will decrease each year by 12%.
The firm structured the note with a longer term maturity than a typical structured note--which usually is about five to six years--because it wanted to cater to insurance companies and pension funds, which are demanding alternative investment strategies that combine income and capital protection. These investors need long-term instruments to match liabilities, Mauceri explained.
