With the development of financial markets, structured equity investment has become an important way for institutional investors to optimize their portfolios. Structured equity refers to customized equity products that are engineered to meet specific investor needs. By combining traditional stocks with derivatives, structured equity provides institutional investors more flexibility and control over risk exposures. This article will introduce common structured equity products, analyze their characteristics, and discuss how they can help institutional investors like hedge funds and pension plans etc. There will be multiple mentions of key terms structured equity investment and equity investment.
Equity-linked notes give fixed income exposure with equity upside
Equity-linked notes (ELNs) are debt instruments that pay coupon interest like bonds, but with payouts linked to the performance of underlying equities. ELNs allow investors to gain equity exposure while also receiving regular fixed payments. For institutional investors concerned about market risks, ELNs can be designed with principal protection so initial capital is secured regardless of stock movements. Overall, equity-linked notes are useful structured equity products that offer institutional investors equity participation through a fixed income instrument.
Convertible bonds lower risk through balanced equity and debt features
Convertible bonds are hybrid debt issued by companies that can be converted into common stock under certain conditions. This ability to convert provides equity upside while the bond nature offers downside protection. Convertible bonds are structured equity products popular among hedge funds for their asymmetric risk-reward profile. Institutional investors can gain equity exposure with reduced volatility by using convertibles. Their convertibility hedge also helps manage changing market conditions. Therefore, convertible bonds allow institutional investors to balance risk versus return.
Callable equity structures enhance yield while managing risk
Callable equity structures involve paired equity assets bundled with options contracts. The long equity position provides dividend income, while the short call options overlay generates premium. This structure enhances yield for institutional investors through the option premium. But the short call also caps upside potential, functioning as a hedge. Callable equity structures are often employed by pension plans to prudently boost equity yields. By customizing the moneyness and maturity of attached options, institutional investors can use callable structures to attain desired risk-adjusted returns.
Tailored equity baskets align with specific portfolio objectives
Structured equity can also come in the form of customized equity baskets. Institutions like sovereign wealth funds often have unique portfolio needs tied to strategic asset allocation views. Banks can offer tailored equity basket products aligned with these specific objectives, for instance: dividend growth, sector tilt, ESG integration, etc. Managers simply provide their desired portfolio exposures or outcomes, while banks synthetically replicate the basket performance using equities and derivatives. Such tailored equity baskets provide focused equity exposure unattainable through index products, benefitting institutional investors with specialized mandates.
In conclusion, structured equity investment allows institutional investors to optimize equity exposure using products engineered with derivatives for risk management, income generation and other benefits. Common structured equity products used by hedge funds, pension plans and other institutional investors include equity-linked notes, convertible bonds, callable structures and tailored equity baskets. When used appropriately, structured equity can help institutions better achieve their investment objectives.