Guaranteed products on baskets of hedge funds are set to be the dernier cri as demand for hedge fund products rises. Mehraj Matto, co-head of fund derivatives at BNP Paribas in London, estimated the market could increase four fold over the next year. Investors are keen for the products because the level of returns in equity was disappointing last year and hedge funds can offer better returns. Guaranteed products open up hedge funds to a number of players that could not otherwise access them, such as some pension funds.
Ian Martin, global head of equity derivatives, convertibles and equity trading at HSBC in London, said "These products are one of the most attractive streams of revenue at the moment." HSBC plans to offer its first public deal in the next two months.
Mark Dickson, global head of product development at HSBC Asset Management in London, said that it is considering structuring these products on two of its alternative investment funds. One stumbling block it has encountered is that the call options are prohibitively expensive. BNP Paribas' Mattoo said the options are expensive because of the lack of liquidity and the complexity of structuring these options.
The products are typically structured as a note and built using zero-coupon bonds and call options. Hedge fund-linked products have existed for a couple of years but the current appetite for hedge funds means more banks have turned their attention to them. Jim Vos, managing director and head of fund linked products at Credit Suisse First Boston in London, said it has offered these products since 1997. After Long Term Capital Management's collapse in 1998 hedge funds became a dirty word. Now the pendulum has swung to a more balanced perspective on hedge fund risk and other banks are looking to offer these products, he said.
