Derivatives have copped a lot of flak since the global financial crisis. Retail investors in particular have turned their backs on structured instruments such as accumulators, which many now see as unsafe, deceptive and complicated.
The widespread losses incurred by holders of Lehman Brothers’ minibonds in Hong Kong and Singapore also encouraged regulators to crack down on issuance, leading to an almost complete halt of sales to the public in both markets.
But, according to one former structured products banker in Hong Kong, investors should put their bad memories aside and take another look.
Times have changed. At the height of the boom in 2007 and 2008, demand for structured payoffs was so high that intermediaries manipulated products to offer an increasingly worse deal for investors — but that is no longer the case today.
“This opens up a window of opportunity for investors, who are regaining a balance of power in the industry,” says Warren Kwan, chief investment officer at LW Asset Management Advisors and former head of equity derivatives at Standard Chartered. “Such low demand provides the chance to negotiate better customisation with intermediaries for certain products.”
Derivatives are not necessarily something to be afraid of, according to Kwan, who argues that they can still be a powerful tool for managing risk-reward profiles. “Its outcome depends entirely on what it is used for, just like any other tool in another industry,” he says. “If used correctly, pay-off scenarios can be adjusted to favour the investor greatly.”
Korea is a case in point. Without any serious exposure to Lehman minibonds, and therefore no politically charged backlash from regulators, Korean investors are once again buying structured notes. Issuance volumes rose more than 50% during 2012 to a record $64 billion, according to Bloomberg, compared to just two listed products sold in Singapore last year.
Hong Kong fared only slightly better with 26 products, Bloomberg reports, but Kwan is optimistic.
“In my opinion, the worst is over — the horizon looks promising for investors as one of the world’s most important industries learns from its mistakes and slowly recovers.”
The hope is that everyone is a bit wiser this time round, from regulators to financial intermediaries and, of course, investors.