Hybrid structured products across all derivatives asset classes will likely continue to grow in popularity throughout the year, as both institutional and retail investors scour the market for investments that will beat depressed equity investments. Rhomais Ram, director at Deutsche Bank in London, said he is seeing investors become more savvy with using foreign exchange spot and options as investment instruments in themselves, rather than hedging tools, a trend that should make marketing of hybrid products easier.
Structurers in equity, foreign exchange and interest rate derivatives groups all said they had to start paying particular attention to hybrids to keep market share last year. "Following last year's weak equity markets, we started adding other assets to our structures to make them more attractive," said Christian Dalban, head of equity derivatives at JPMorgan in London.
Dalban said his group began adding bond indices and commodities to its equity products at the request of investors late last year. Likewise, JPMorgan's currency solutions and structured products group developed principal-protected global range notes last year, which use a similar technology to first-to-default baskets of credit derivatives. David Kitson, head of currency and commodity structuring at JPMorgan in London, explained the global range product allows an investor to receive an enhanced return if a maximum of five assets, which could include commodities, currencies or interest rates, stay within a set trading range.
KBC Financial Products, which typically structures capital guaranteed notes on equity-based products, also began structuring hybrid products last year (DW, 9/23). This was due to a 50% fall in demand for pure equity-linked notes, said Carlo Georg, managing director and head of trading in London. The new products are capital guaranteed medium-term notes or funds that give combined returns on equity indices, hedge funds and bond funds or indices.
Demand for return from multiple asset classes also came from institutional investors--mostly from those that typically relied on structured interest rate derivatives products to generate returns. Bear Stearns began offering more hybrid products when pitching to the typical interest rate derivatives investor, said Morad Mahlouji, senior managing director and head of fixed income derivatives marketing in London. In fact, Mahlouji hired Julien Petit as a managing director in his group in London last year from Bank of New York in London to focus on structured products--specifically hybrids (DW, 10/7).
Deutsche Bank's Ram said last year was the first time his group structured a significant amount of hybrid products--previously, the group would only do one-off transactions. Demand from institutional investors heated up for interest rate products with an fx component during the second half of the year as the yield curve flattened and investors could no longer make money on trades that took advantage of a steep yield curve. In general, the firm structured trades where the investor wins if both an fx rate and interest rate stay within a set range, Ram explained.
