If you are like many investors, you were surprised by the election results from earlier this month. Regardless of where you are on the political spectrum, the one thing it seems that we can all agree on is there is a fair amount of uncertainty as to where the country, and with it the markets*, go from here. In practical terms, uncertainty can often surfaces in the market* through an increase in volatility. And while we haven’t seen any large spikes in VIX, or other measures of implied volatility, many believe it may only be a matter of time before we start seeing large swings in equity* prices. Perhaps we’ve only just seen the beginning of this. In the days leading up to the election the market* rallied almost ~ 3%. Then on election night, in a matter of hours the equity* futures sold off ~ 5% before recovering to open flat, and then closing more than ~1% higher on the day. Since election day, the S&P 500 has rallied more than 3%.
During periods of heightened volatility, many advisors look to implement structured notes in their portfolio, whether it’s putting cash that had been on the sidelines to work or rotating out of current investments into them. We believe there are two main reasons why we continually see this trend:
1) Volatility Mitigation – Intuitively, advisors often look to allocate to investments with downside protection when uncertain markets lay ahead, and structured notes may provide this benefit. The downside protection feature may help assuage investors’ fears about mistiming the market, or protect against a prolonged market downturn.
2) Enhanced Terms – Many structured notes offer better terms (ie: higher coupon, greater max return, more downside protection) when volatility increases, due to the pricing dynamics inherent within the note. Therefore, structured notes may be an actionable idea for advisors to discuss during these types of market environments or any time of increased uncertainty.
The foregoing does not purport to be a complete or accurate representation of all factors to be considered in connection with the purchase of a structured note and should not be relied upon for any purpose whatsoever. Prior to the purchase or sale of a structured note, investors should be aware of the significant risks pertaining to the business and financial condition of the issuer(s) of the underlying investments and related derivatives, including, without limitation, the creditworthiness of such issuer(s). Structured notes are complex products that have a variety legal, credit, tax and accounting implications. Investors should consult with their financial advisor prior to purchasing or selling a structured note. STRUCTURED NOTES ARE NOT SUITABLE FOR ALL INVESTORS; investors SHOULD BE AWARE THAT THEY may lose some or all of their initial investment.
To better understand how structured notes can fit into your portfolio from an asset allocation perspective, or to learn more about the product set in general, please visit our educational resources on the CAIS portal or contact a member of our Structured Solutions team:
Marc Premselaar, Director Structured Solutions 212-201-2317
Stephen Czick, Senior Vice President Structured Solutions 310-730-5767
Matthew Brennan, Vice President Structured Solutions 212-202-2969
Sources: Bloomberg Data as of November 28, 2016
*In the context of this piece, the “market” or “equity” is referring to the S&P 500 Index
This communication is for informational purposes only, is not a complete description of the terms applicable to an investment in the security described herein and does not constitute a solicitation or offer or an invitation to make an offer to buy or sell any securities product and nothing herein shall constitute an offer of any product or service in any jurisdiction where such product or service would be unlawful or require registration. Any such solicitation or offer or invitation to make an offer to buy or sell any security may only be made by means of a relevant offering memorandum.