What's the hottest derivatives product this year? CPPI structures.

Call 2006 the year of Constant Proportion Portfolio Insurance derivatives.
Looking for a hot structure these days û consider derivatives designed around constant proportion portfolio insurance (CPPI), which offer multiple credit strategies, are actively managed and often principal protected.

Most people think of using CPPI in equities û but it is becoming increasingly popular to employ CPPI with other underlyings to create new structured products. Increasingly there have been a large number of structures linked to fixed income, hedge funds, commodities, credits and foreign exchange to boost yield and to provide portfolio diversification to investors.

Right now, SociTtT GTnTrale Corporate & Investment Banking, Calyon Corporate and Investment Bank, and ABN AMRNO are all offering such products.

"Credit based CPPI structures provide clients with flexible, principal-protected products, which makes these structures very attractive to investors seeking higher yields with principal protection," says Gilbert Tse, managing director & head of structured derivatives for SociTtT GTnTrale Corporate & Investment Banking in Hong Kong. "The enthusiastic response we have received during our roadshows in EMA region helps explain the rising demand on this product."

ABN AMRO has offered numerous principal protected products using CPPI since 2002 to Asian investors. One of its more popular products is the CPPI note linked to a single manager Fx-fund managed by ABN AMRO Asset Management.

This Fx note product targets an average return of 8% to 11% per annum; Fx 1, the first in the family of the Fx note series, which was launched in Oct 2002 in Asia and is currently trading at 139.25% NAV as of the end of January 2006. The AUM of the Fx Note series is currently in excess of $1 billion and boasts most of its investors from Asia.

ôApart from our very successful Fx note series, we've structured CPPI products around indices, actively managed fund of funds and single manager funds with different underlyings, including multi-strategy hedge funds, commodities, emerging markets bonds and credit portfolios,ö says Barry Lau, Head of Fund-linked Derivatives Asia at ABN AMRO.

BNP Paribas raised a total of 740 million euros on its first managed credit-based CPPI product, which it called Dynamo, and indeed was dynamic as the bank raised more than its initial Eu400 million target. ABN AMRO in 2004 offered a 10-year capital-protected product called ôRente Boosterö to retail investors based on the performance of the iTraxx Europe Index and in 2005, ABN AMRO offered a CPPI note linked to an actively managed credit fund by AXA Investment Management.

One of the reasons attributed to this new growth market is a view that the yields in the collateralised debt obligations (CDOs) space may be tapped out. Plus, they are not capital guaranteed. Managed capital guaranteed products mean that managers can concentrate on being more aggressive with the excess money they have to play with û rather than making defensive moved aimed at not losing the principal.

ôInvestors want yield, but they also want to diversify their portfolios, and CPPI structures offer this,ö notes Lau. He points out that a client may want to invest in Fx as an asset class, or an emerging market bond û and these structures enable them to do that with less risk.

Another plus, is that the credit market has been relatively stable, so there is the selling point that the risk of default is relatively low.

"There are not as many constraints with CPPI as there are with say, CDOs," adds Pierre Trecourt, executive director, head of structured credit and CDO for Calyon, Asia Pacific.

CPPI-based products show a trend from offering more basic, synthetic collateralized loan obligations (CLOs) and CDOs first widely available in 1999 and 2000 to more complex, actively-managed structured products based on more flexible underlyings becoming popular the past two years.

Whether or not investors take to the products for the long-haul û which often have clearly delineated fees on the front end, which may put some investors off because the black and white figure is more daunting than the unknown û remains to be seen.
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