Hedge fund structured products

Abstract

In the aftermath of the bear market and one of the most volatile periods in recent financial history, individual and institutional investors worldwide are reevaluating their asset allocation strategies. Interest in hedge funds and alternative investment styles is growing as investors realize these investments offer better return potential with relatively low correlation to traditional asset classes. However, returns of hedge funds have been somewhat lackluster recently, on average, and several factors indicate investors should expect similarly muted performance in the future. Hedge funds also expose investors to non-traditional risks, such as lack of transparency, lack of regulatory oversight, and limited liquidity. Structured products mitigate these risks and allow for flexibility in portfolio construction. They can help reduce the risk of an investment in exchange for a reduction in the potential upside. Additionally, they can provide a greater chance of a good return through the use of leverage. Because structured products can be designed to meet a variety of investment objectives they have become an increasingly popular way to gain exposure to and benefit from a variety of hedge fund strategies. The discussion of hedge funds and the ways in which structured products can be utilized to enhance return and mitigate risk is a broad and expansive topic. This paper is a primer on what hedge fund structured products are and how they can be used to enhance the risk/return profile of a portfolio. The focus is on the US market.