Evolution of Absolute Return Structured Products
(Feb 2013)
From 2006 to 2009, a type of structured product known as an absolute return barrier note (ARBN) was issued by a variety of major investment banks. ARBNs are interesting because they are linked to the absolute value of the return on an underlying, not just its return, and therefore are considered non-directional bets. We've done a lot of work on ARBNs here at SLCG, including a research paper that values a sample of ARBNs and finds they are worth on average 4.5% less than their purchase price...
How Big of an Effect Does Securities Lending Have on ETF Returns?
(Feb 2013)
We earlier posted an analysis that compared ETF returns to their stated index net of fees for funds that lend securities and those that do not. IndexUniverse subsequently suggested an approach with methodological differences from our original work and we wanted to address some of those differences here.
For our sample, we used Bloomberg's ETF function to collect all US-domiciled, USD-denominated exchange-traded funds and removed any with active trading strategies, leverage, or inception dates...
Securities Lending by ETFs
(Feb 2013)
One of the most contentious but least understood aspects of the stock market is short selling. Short selling refers to selling a stock that you do not own at current market prices, with the hopes that the stock will go down in price. The stock can be purchased in the market at any time to close out the position and, if the stock has decreased in price, the short-seller will realize a profit. Obviously, the only way to accomplish this is by borrowing that stock from someone else.
Typically,...
Chinese Markets are Closed--So What Happens to China-based ETFs in the US?
(Feb 2013)
Happy Chinese New Year! Markets were closed in many Asian countries last week, while US markets remained open. As noted by several commentators, this means that while US ETFs that hold Chinese equities were actively traded, their underlying assets were not. So what does this mean for China-based ETFs traded in the US?
First, it's important to note how ETFs relate to their underlying assets. Essentially, ETF shares can be created by certain traders (called authorized participants) by buying...
So How Complicated Can Structured CDs Get?
(Feb 2013)
We could tell you that the last time we went fishing we caught a fish that was THIS BIG (motions with outstretched arms), but you probably wouldn't believe us unless we showed you. We wanted to take this opportunity to show some examples of truly complex structured certificates of deposit that have been constructed in recent months and years.
Let's take a look at JP Morgan's August 2012 fifteen year "Callable Variable Rate Range Accrual CDs Linked to 6-Month USD LIBOR and the S&P 500 Index"...
FDIC Insurance and Structured CDs
(Feb 2013)
As a continuation of our structured CDs week here on the SLCG blog, today we're going to discuss one of the biggest selling points for these products: FDIC insurance. FDIC insurance mitigates most of the credit risk found in structured products, but it may not be as significant a factor as the marking materials for structured CDs may suggest.
Structured products, the debt analog of structured CDs, are often maligned because of their exposure to credit risk. If the issuer of a structured...
What Does a Simple Structured CD Look Like?
(Feb 2013)
Okay, we've talked a bit about what structured CDs are and why we think they are interesting. But what does a structured CD offering document actually look like? Unfortunately, it isn't possible to find such documents from Bloomberg or the SEC website since structured CDs are not registered securities. However, you can often find offering documents using Google. For example, as a relatively simple equity-linked CD, we're going to take a look at the "Global Opportunity Certificate of Deposit...
Structured Certificates of Deposit Week
(Feb 2013)
Over the past several months, we have noticed more and more bank deposits that resemble structured products. These products go by various names: market-linked certificates of deposit, equity-linked certificates of deposit, contingent interest certificates of deposits, etc. For parsimony, we refer to these types of products as "structured CDs" or simply "SCDs".
We think structured CDs are a very significant development, as they can be designed to provide highly complex exposure, are almost...
Call Options on Hedge Funds: Double Markups and Detrimental Mispricing
(Feb 2013)
A recently settled FINRA Arbitration case was brought by an investor who was sold a $2M call option on a basket of hedge funds by a large investment bank. The case was notable for two reasons. First, the investment bank charged a 25 percent markup on the fair value of the option. This large amount was charged even though the investment bank -- call it Investment Bank 1 -- simultaneously laid off all of its risk by buying an equivalent call option from another investment bank -- call it...
Crowdfunding and Real Estate Investing
(Jan 2013)
The JOBS Act of 2012 was ostensibly designed to increase investment in small businesses. One of its provisions was to allow private placement investments (such as hedge funds, oil and gas partnerships, etc) to advertise publicly. Another provision is to allow for 'crowdfunding' of real estate and other investments, in effect allowing the sale of partial interests in speculative ventures to small retail investors. Kaitlin Ugolik at Law360 has a great review of the implications of this...
