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Structured Notes In A Low Yield Environment

Structured Notes have emerged as a unique opportunity for investors and issuers in a low yield environment. Halo Investing Co-founder & President, Jason Barsema discusses how structured notes can benefit investor portfolios.



Once Out of Reach

Structured Notes as an asset class is not new. Institutions and family offices have been the primary investors in the US in part because of high barriers to entry.

Due diligence requirements and trading costs made structured notes an expensive choice for financial advisors to include in all portfolios. A lack of investor education about how structured notes can work in a portfolio also kept interest limited to all but the most sophisticated investors. Now, as costs have come down and technology has improved, there are more opportunities for issuers and advisors to bring structured notes to a range of investor portfolios.

The Search for Yield

In an era of ultra-low fixed income yield, structured notes can serve as a source of return while also providing a level of portfolio protection.

For the uninitiated, structured notes combine a zero-coupon bond issued by a bank and derivatives package included for the payoff structure. This provides investors with flexible return and income possibilities over the life of the security.

Issuers of structured note products are primarily leading global financial institutions, like banks. Firms issue structured notes because it offers a way to customize return and payoff structured for investors. Structured note returns and pricing is dynamic and moves with market variables.

A sample of market variables that impact structured note return levels include interest rates, volatility, credit quality and dividends, to name a few. Since structured notes feature both a zero-coupon bond and options package, the investor is able to participate in upside movements if desired, and also protect against negative price movements on the downside.

In this way, structured notes can diversify equity exposure and provide a potentially higher return than a mix of vanilla bonds.

Structured notes also typically exhibit a lower correlation to the broader market because of the bespoke nature of the securities which can be helpful during volatile markets.

Technology Provides A New Level of Visibility

As with any asset class, it’s important for advisors and investors to know what they own.

Historically, for structured note investing, that has meant working with distributors or directly with banks who can sort through lengthy term sheets and financial jargon to understand everything included in a structured note.

At Halo, we have removed much of that guesswork by providing a dashboard that explains clearly what is in a product, the risk profile, and who the issuer is. The dashboard also provides rolling analysis over the life of the security so investors can have peace of mind throughout the investment lifecycle.

Advisors and investors can use this information to determine position sizing, adjust exposure, and ensure that investment portfolios remain optimized to investment goals and individual investor risk tolerance.

That’s essentially everything investors used to have to hire a whole team of people to do. The dashboard also provides a new level of visibility into the broader structured note market.

Halo is connected to 27 of the world’s largest issuers of structured notes. Halo technology allows advisors and investors to compare products across these issuers – information that was previously funneled through a series of gatekeepers each with their own interests. The result is an investment process that is not unlike choosing a mutual fund or ETF.

Ease of Distribution

For issuers, Halo’s technology also has unique benefits. In a way, we’re the Amazon of structured credit. Our platform provides a significant distribution channel for structured notes and an e-commerce style experience that makes it easy to use.

Halo is already connected to the top custodians and infrastructure necessary to distribute structured notes, meaning that issuers can join without undertaking a lengthy integration process. As a result, financial firms can issue significantly higher volume with fewer manhours to bring new product to market.

Using the Halo technology platform removes the need to manually transact structured notes. Gone are the days of phone orders and repetitive data entry. Instead, issuers can work with clients on building high-quality securities and getting them out to a wide range of investors efficiently.

Real-Time Platform

In volatile markets, platform automation can be helpful as well. During the first quarter of this year, investors and advisors managed their exposure through the Halo platform, which took pressure off of sell-side trading desks during a highly sensitive time.

Instead of managing a deluge of phone calls from panicked investors and advisors, Halo’s risk analytics provide real-time information about exposures without the need for a phone call. In a moment when issuers, like everyone, were transitioning to remote work and setting up offsite trading environments, issuers that worked with Halo were essentially already set up.

Relationships Still Matter

Despite the advances in technology finance is still a people business. While the Halo platform helps to automate new issuance, product comparison, and investing, it’s not a purely hands-off experience.

Our goal with the Halo platform is to make it easier to invest in structured notes. That means that education and support are as important to our process as automation. Knowing what you own is more than just reading a term sheet, after all.

Our team works closely with advisors, investors, and issuers to provide support and educational information. Halo users can rely on our support as much or as little as they need. Technology may make investing easier but ultimately, trusted relationships are still a core part of the process.

Providing Access

It’s taken a few years, but structured notes are now following the same path as many other asset classes in the US. New technology has helped to bring costs down, improve transparency, and flatten access.

As a result, structured notes are now available to more investors than ever before.

Halo has expanded the market for structured notes by building a platform that makes it easy to bring new product to market and educate investors and advisors about how the asset class can benefit portfolios.

Structured notes are already a popular asset class worldwide, and we think that the next growth area will be in the US.

Halo is excited to be part of that journey.

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