What’s Ahead

Kris Konrad joins What the Halo to discuss how Structured Notes can be a good source for uncorrelated investment income.
Kris discusses his structured note strategy with an emphasis producing above-market yields – the Structured High Income Strategy.
Find out how advisors can turn market volatility into investment opportunity.

Key Moments:

0:00 Introduction
0:40 Uncorrelated income: A modern all-weather portfolio staple?
4:57 Why Structured Notes for uncorrelated income
5:53 Making sense of Structured Note fees
8:22 Clearing up some misconceptions
10:46 Structured Notes as fixed income substitute

Read the full episode transcript below:

David Townsend, CFA: Welcome back to the What the Halo podcast. I’m your host, Dave Townsend. As always, please hit that like and subscribe button. It does let us know that you like this.

Today, I’m joined by Kris Konrad of Piton Investment Management. Before we dive in here, Kris, why don’t you just give our viewers a little quick overview, who you are, a little bit about about Piton. We’d love to learn a little more.

Kris Konrad: Sure. Thanks, David. Thanks for having me on. My name is Kris Konrad. I am one of the founding partners and managing members of, Piton Investment Management.

We are a boutique, fixed income manager that caters to ultra high net worth individuals, specializing in SMAs.

David Townsend, CFA: So, I brought you on today because I gotta be I gotta be honest. One of the more interesting things that I’ve, ideas I’ve stumbled across recently is this idea of uncorrelated income, which you guys had turned me on to. And it got me thinking about, there was a financial advisor from the eighties. I know this is a little bit dated, but, his name was Harry Brown.

The permanent portfolio was essentially what he had created, and it was on a as a product of, like, as a response to the seventies where there was an inflationary environment. And so his response was this permanent portfolio, and, the significance towards essentially equally weighted four parts, growth, stocks, bonds, cash, and gold. And the idea was to say it was kind of a four quadrant approach where regardless of the macroeconomic environment that this would perform well in any environment. And, of course, today that there’s been spin offs of like a cockroach approach I know from the guys at Mutiny Funds and so forth.

But the significance here that, like, at the end of the day, the idea was here is is what Harry was up to was to say so much of, portfolios are geared towards, like, pro growth, pro GDP centric. So most of their sources of, like, income, growth, however we want to define it, all kinda come from the same place, set a different way is that they’re really kinda geared to I know we’re it’s around the time of the Super Bowl here. I won’t ask you who you’re who you’re rooting for. But, like, portfolios are generally designed today to be very, GDP centric, very growth, and they kinda get, you know, most of the outcomes are derived from the same place.

And so when I stumbled across this idea of uncorrelated income and what you guys were up to, I was really, really intrigued because it was, like, finally, like a true alternative to say stocks, bonds, REITs, venture capital, private equity. At the end of the day, they’re all very “all gas, no break,” “all offense, no real defense.” So they’re deriving the income the investment income that these producers from all the same sources. And so it it really got me it I was really intrigued by this idea of uncorrelated income, which you guys are up to.

Can you, break this down for us or help me help me make some more sense? Why where did you stumble across this across it? Why do you like it? Why are why are your clients looking at it?

Kris: Great question, David.

To me, when investors and ultra high net worth individuals look to purchase income, as you mentioned, they are typically going into the markets to buy yield and, specifically, the US fixed income markets. So this ranges from ultra safe US treasuries and then all the way out to down in credit. Could be deep credit. Could be private loan markets.

Obviously, the more risk you’re taking on, the more yield.

But another place to, that income can be farmed is from volatility. Essentially, selling options on underlying securities. This could be in the form of single name equities or even broad market indices. And these these markets tend to not be as correlated to interest rates or other traditional forms of, income or yield providing securities. And sometimes in the case of single name equities, they can even be uncorrelated to the overall direction of equity markets.

David: Yeah. And there’s those there’s so many. I mean, obviously, JEPI, the likes of JEPI and the covered call, and it isn’t exactly what’s interesting is that it it isn’t a terribly new product, but what it I mean, the proliferation in the past several years is is interesting, given that I I maybe it was for the longest time something of an institutional oriented thing and, like, all other advancements, maybe retail investors are catching on now more frequently.

But what’s interesting so why use structured notes? I know you guys prefer structured products as a wrapper, more specifically structured notes to kinda like as the wrapper or vehicle to tap into this opportunity. Why do you think structured notes versus the the numerous other ways you could do this?

Kris: Well, I think you really hit the the nail on the head there. It’s really about the wrapper. And for these transactions, which in the case of, income oriented structured notes, you have sales of long dated options. You have purchase of zero interest bonds. And, through the mechanism of, creating a note, hopefully using the Halo’s platform to do this, you are essentially getting, a bundle of all these, parts.

So, essentially, at the end of the day, it’s gift wrapped and sold in the form of a security by the issuer.

David: Yep. So let me put you on the spot here. And you and you could very general high level here because the obviously, one of the, like, main criticisms folks will say or people get and I and I get it to some level. You know, transparency is difficult in certain financial products. It’s like cost wise. And I know you guys with fixed income pedigree can really weigh in at a deeper level around cost and so forth. And so everybody thinks about they look at these, like, you know, the the, the low everybody just simply because something is low cost doesn’t mean you’re getting any real good value or you’re getting a good product that we could go all day about what that means.

But, like, if you guys think about structured notes to tap into some of these opportunities, how are you guys kinda thinking about fees or cost or value, I guess, more specifically relative? Because you you guys are smart. You could do this with, like you said, options, be them listed, unlisted. There’s a million different ways that you can manufacture an exposure.

When you’re thinking about value and cost, where where are you guys at in terms of, like, structured notes?

Kris: Sure. No. Great great question. You know, at at the end of the day, it comes down to execution. And, certainly, when you’re talking about trading long dated options, you know, the bid ask on that stuff is, you know, is generally much wider than shorter term, near term options. So there is an execution cost there inherently.

And then, you know, as you delve down into products that have a lot of yield associated with them, so the further you are going away from US treasuries, per se, you know, the the bid ask on that type of product is generally gets wider as the risk profile, goes up.

So from a cost perspective, structured notes have, yes, always been thought of as a very high cost product. But when when you compare it to those to the characteristics of other like products that are, you know, had commensurate returns, I don’t think it’s too far off. And, certainly, in more recent years, as the proliferation of structured products and structured notes has increased, you know, costs have have come down. So that’s you know, I think that will continue to be the case.

David: Yeah. And I get like, all of things, there’s just so much misconceptions about things and so and dated kinda thinking. So which I which brings me to a question here. I know, this was was off the script, Kris. I just literally thought of this one.

If you’re sitting around in a casual setting, say, we’re with a, like, a bunch of like minded investment types and the what would be the one thing you would tell folks about structured notes that maybe they don’t really know or the one thing that they should know you know, when thinking about maybe miss clearing up some misconceptions and so forth. Is there anything that jumps out at you to say, hey, guys, this is really, you know, some dated thinking. Here’s how really, you know, these things are used in 2025 and so forth.

Kris: I think I think people with high market acumens will always say, yeah. I, you know, I can essentially build a structured note, myself by accumulating the parts. But at the end of the day, you know, there’s a lot of work involved in that, you know, selecting the options, selling the options, getting, execution on zeros. So there’s a lot that goes into it. I think to have it gift wrapped, by the issuer and provided in the CUSIP, you know, it’s absolutely worth the cost in my opinion. And I think that’s what people, especially, intelligent market participants, I don’t think they, appreciate that to that extent.

David: Well, it’s funny. I just I was just reading an article. I think it was, like, maybe from BNY, I forget. So like a like a study that was that their survey that they’d asked a bunch of advisers. And what was kind of an interesting output was it to it, because everybody knows the typical advisor is doing a hundred things. Right?

And, like, we we just we we underestimate the value of, like, convenience. Right? Like, this is, like, people are busy. And and the more complicated the product and like you said, like, it’s bundled up. Something that sometimes when you get a nice tidy bow on it, even if it does cost you a little bit more, I think the the smart people, smart money knows that you’re getting value for something like that.

Kris: I agree. I agree.

David: So, last question here for you. Just side of zooming out a little bit because, you guys have such a a strong background in fixed income markets. Generally, a very you know, a strong pedigree. Just when you think about structured notes and especially the in the search of yield. Right?

Why do you like structured notes relative to the many other fixed income options that are out there today?

Kris: Sure. Yeah. First and foremost, it’s the outside yield, the outsized yield. Yeah. It’s very easy to structure income notes off of why we held names, you know, names like Uber, Google, Coinbase, Oracle, and, you know, any of the names that are constantly being, talked about on CNBC or whatnot.

It’s very easy to structure notes that have double digit coupons off of those names. And, you know, the great thing about, especially, Halo’s tool is that you have the ability to structure them however you want them. You know, you’re able to structure them with monthly coupons as opposed to quarterly or even biannually, which is commonplace in in in the corporate debt world.

You can embed calls that, you know, will further increase coupons. So to me, these, you know, when compared to, say, single b or triple c credit that you’ll find in any junk bond ETF or or even, you know, in the in the very hot private loan market, which is, you know, been all the rave the last few years.

You know, you’re talking well into the double digit coupons versus seven to eight percent in those in those other areas. To me, you know, from a risk adjusted return standpoint, I I would much rather prefer that.

David: Yeah. I always challenge people. Okay. Here. Do me a favor. Go find me a product that, offers double digit returns, and I get to customize the terms and so forth, you know, to some level, you know, really tie dial this into my preference. And I I I’m still waiting for people to come back with a, with a better financial product that can deliver.

Kris: That’s true.

David: Well, hey, Kris. It’s always great catching up with you. We real as always, man, we appreciate your time today, and, we look forward to speaking with you again.

Kris: Yeah. Thanks, David. Thanks for having me.

Please see our Halo Disclosure Page for important disclosures.

An investment in Structured Notes may not be suitable for all investors. These investments involve substantial risks. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Content and any tools discussed are provided for educational and information purposes only. Halo Investing makes no investment recommendations and does not provide financial, tax, or legal advice. Any structured product or financial security discussed is for illustrative purposes only and are not intended to portray a recommendation to buy or sell a particular product or service.