Equity derivative players in Asia are starting to see a shift away from popular constant proportion portfolio insurance structures due to concerns of market corrections in the region.
CPPI works by moving investor money between a leveraged investment in a high-yielding asset and a safe asset, such as a zero-coupon bond. When the high-yielding asset takes a tumble, the investment may become locked in the safe asset if the structure does not unwind the leveraged position quickly enough. If the structure is cash locked early in its life, investors are likely to receive only capital back at maturity, and the CPPI mechanism does not allow structurers to reallocate to the risky asset even if volatility levels improve.
"We're...seeing a slowdown in CPPI compared to the last six months or so," said an equity head at a bulge-bracket house in Hong Kong. Constant proportion portfolio insurance has taken the region by storm over the last few years, becoming a multi-billion-dollar business--with new twists popping up such as option-linked CPPI structures (DW, 4/7).
Matthew Wong, head of the private investor products group for Asia at ABN AMRO in Hong Kong, noted CPPI-linked structures have been on the menu as Asian investors have benefited from rising equity markets while protecting their principal. But, growing concerns over increasing volatility and potential market corrections have reduced client interest.
The investment environment has prompted equity houses to shift to alternative structures and underlying. For guaranteed products, Wong's suggesting clients look at simple option-embedded notes, which would be called only at maturity, rather than regularly adjusting for equity moves in case there is a downturn in the market in the medium term. Houses are also pushing commodity-linked deals as investors in the region are getting more comfortable with the asset class. "This is something we've been developing," said the equity head. Firms in Asia have for instance been pushing notes linked to the Rogers International Commodity Index.
