The structured products market brings together a diverse group of participants, each with distinct roles and objectives. These participants are investment banks, private banks, investors, and corporations, all of whom interact to create, distribute, trade, and use structured products. At the center of the structured products market are investment banks, which act as originators, structurers and market makers. They create and distribute structured products either for their own funding needs or on behalf of clients looking to raise capital. The money raised from structured products may therefore be used by the bank itself for products such as equity linked notes and dual currency deposits, or it may be used to help corporates, individuals, or institutions in their capital raising needs through the use of asset backed securities, collateralized debt obligations, and credit linked notes. Within investment banks, several key roles contribute to the structured products process. Salespeople maintain relationships with clients providing market information, product ideas, and pricing insights. Their role is to identify client needs and ensure they are matched with suitable structured product solutions.
Structurers work alongside sales teams to design tailored structured products by combining derivatives and assets in the most efficient way, and the traders handle market making and risk management. Ensuring that structured products are priced accurately and that any exposure resulting from client trades is hedged efficiently.
While investment banks create structured products, private banks and the wealth management divisions of large financial institutions play a crucial role in distribution.
Unlike investment banks, they generally do not structure these products themselves, but instead act as intermediaries offering structured products, primarily equity linked structured products to their wealthy clients. Private banks ensure that their clients gain access to structured products that align with their financial goals, while execution and risk management remain the responsibility of the larger financial institutions.
The main buyers of structured products include a broad range of investors from high net worth individuals and family offices to institutional investors like hedge funds, pension funds, and sovereign wealth funds. High net worth individuals and family offices are among the biggest buyers of equity linked structured notes, which provide exposure to stock indices, baskets of equities, or customized market strategies, while offering tailored risk return profiles. Other institutional investors may have more specialized approaches, pension funds, insurance companies, endowment funds, and traditional asset managers tend to prefer standard cash assets like equities and bonds, but may also invest in structured fixed income instruments such as mortgage backed securities or collateralized debt obligations.
Some may selectively use structured products to hedge currency or interest rate risk, but they generally avoid highly complex equity structures. Sovereign wealth funds tend to focus on highly liquid and credit worthy markets, typically investing in mortgage-backed securities and other structured credit instruments, while generally avoiding exotic derivatives and niche products. At the more flexible end of the spectrum, hedge funds have the broadest mandates and can invest in almost anything. They tend to favor derivatives over physical assets as they often seek leverage or short exposures, actively trading exotic options, structured notes, and bespoke derivatives.
While all these investors buy structured products for return enhancement or hedging, corporations use structured products primarily as risk management tools. Many large corporates are concerned about rising interest rates, especially if they have floating rate debt and use structured products to lock in fixed rate payments. Others focus on FX exposure using a mix of standard and exotic derivatives to hedge currency fluctuations, particularly if they operate across multiple countries in industries such as energy and manufacturing. Corporates also hedge commodity price risk using structured solutions to manage exposure to oil, gas, metals, or agricultural commodities.
