SLCG Research: Dual Directional Structured Products
(May 2012)
Earlier this month, SLCG released a new research paper that values Dual Directional Structured Products (DDSPs). DDSPs are debt securities that feature payoffs very much like a long straddle position on the underlying asset for small price movements -- the investor realizes gains if the underlying asset increases or decreases in price (the origin of the term 'dual directional') within a certain range during the term of the note.
DDSPs differ from a conventional straddle position in a number...
SLCG Research: Reverse Convertibles and Stochastic Volatility
(Feb 2012)
We've talked a lot about structured products -- and reverse convertibles in particular -- on this blog. In this blog post we discuss reverse convertibles in more detail and present some results found in a new research paper my colleagues and I have just completed.
Reverse convertible notes -- or simply "reverse convertibles" -- are structured products whose payoff at maturity is dependent upon the return of an underlying asset or security during the tenor of the note. If the underlying asset...
SLCG Research: Oppenheimer Champion Income Fund
(May 2011)
SLCG released today 'Oppenheimer Champion Income Fund'.
Oppenheimer's Champion Income Fund (the Fund) was an open-end mutual fund that invested in high-yield bonds. It lost 80% in the second half of 2008, the highest loss for a mutual fund in Morningstar's high-yield bond fund category.
In this paper, we look at the portfolio management rules and decisions of the Fund in the context of what was happening in the markets. Leverage using debt to fund further investments was prohibited by...
SLCG Research: Modeling Autocallable Structured Products
(Mar 2011)
SLCG released today 'Modeling Autocallable Structured Products'.
A callable structured product is a note that is callable by the issuer. The note is linked to an underlying asset, or 'reference asset.' If the reference asset reaches the call price during the term of the note, the note is called and note holder receives a pre-specified return. If the reference asset never reaches the call price during the term of the note, the note is never called and the note holder simple receives the...
SLCG Research: Leveraged ETFs
(Aug 2010)
SLCG released today 'Leveraged ETFs, Holding Periods and Investment Shortfalls'.
Exchange-Traded Funds is an investment fund that holds stocks, bonds, or commodities and typically tracks specific indices of such asset classes. Leveraged and inverse leveraged ETFs were first introduced to the market in June 2006 by ProFunds, which promiseds to return a multiple of the underlying index return by rebalancing their portfolios at the end of each day. The total market value of leveraged and...
SLCG Research: Principal Protected Notes
(Jul 2010)
SLCG released today 'The Anatomy of Principal Protected Absolute Return Notes'.
Structured products are debt securities that often have unconventional and complex payoff structures. Their payoffs are often linked to a security or index, such as the S&P 500 or the Russell 2000, with asset classes ranging from equity, commodities, currencies and debt. A Principal Protected Absolute Return Barrier Note (ARBN) is one structured product that returns the absolute value of the return of the...
SLCG Research: Reverse Convertibles
(Jun 2010)
SLCG released today 'What TiVo and J.P. Morgan teach us about Reverse Convertibles'.
Structured products are debt securities that often have unconventional and complex payoff structures. Their payoffs are often linked to a security or index, such as the S&P 500 or the Russell 2000, with asset classes ranging from equity, commodities, currencies to debt. A reverse convertible note is an equity-linked structured product. It is a short-term note that pays a relatively high coupon rate...
SLCG Research: Abuse of Structured Finance
(Jan 2009)
SLCG released today 'Regions Morgan Keegan: The Abuse of Structured Finance'.
Six Regions Morgan Keegan (RMK) bond funds lost $2 billion in 2007. In the paper, we argue that the loss was not due to 'flight to quality' or 'mortgage meltdown' but to RMK's portfolio concentration in subordinated tranches of asset-backed securities.
We also find that RMK misrepresented to investors and the Securities and Exchange Commission (SEC) in several ways. Firstly, RMK did not disclose to the SEC...
SLCG Research: Collateralized Mortgage Obligations
(Jun 2007)
SLCG released today 'A CMO Primer: the law of Conservation of Structured Securities Risk'.
Recently, the finance industry witnessed the bailout of two Bears Sterns hedge funds and the collapse of Brookstreet Securities. Both had portfolio holdings of collateralized mortgage obligations (CMOs) and suffered huge losses thereof. We have seen such CMO losses before, when in 1994 interest rates rose, CMOs fell in value and bond mutual funds suffered unexpected losses.
In this paper, Dr....
