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Derivatives

Alternative Manager Structures Guaranteed Notes

Alternative Asset Advisors, a Swiss hedge fund manager with USD900 million in assets under management, has structured an equity-linked note that uses over-the-counter equity derivatives. Tony Morringiello, ceo in Geneva, said the five-year capital-guaranteed notes are referenced to its fund of global diversified hedge funds, known as ACE. He referred further queries to officials in the fund derivatives group at BNP Paribas, which structured the deal.

A structurer at BNP Paribas in Paris said the fund uses zero-coupon bonds to achieve the guarantee and an OTC call option on ACE that is embedded in the notes and written by the bank. He said the call is not a vanilla option, although "it would be arrogant to call it an exotic option." By purchasing the notes, high-net-worth investors waive performance rights on the fund for the first roughly 1% of gains, allowing for a cheaper option and nearly 100% participation. "Giving up the rights gives you a cheaper option," he noted.

The fund of hedge funds has an annual projected return of 12-15% and the guaranteed notes are slightly lower. The notes are being aimed at high-net-worth Swiss accounts as well as investors across Europe, the official said.

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