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ALTERNATIVE INVESTMENTS AND STRUCTURED NOTES

Updated: 4 days ago








By Louis Green, CFA®, CFP®, CRPS®


Alternative Investments & Structured Notes

There are other strategies available for you to consider, provided you meet the minimum suitability criteria. Many of these strategies are highly illiquid and/or hold more risk, so they tend to require a minimum net worth, among other factors, to be deemed suitable for you.1

These strategies include structured notes, hedge funds, private equity, private credit, real estate, and commodities.


Structured Notes

A structured note is a pre-packaged investment that includes assets linked to a bond plus one or more derivatives, such as call and/or put options. A call option is a right to purchase a stock or index at a specific price. A put option is a right to sell a stock or index at a specific price. The derivatives are tied to an index or basket of securities and are designed to facilitate highly customized risk-return objectives.


Bonds typically aim to pay a combination of interest income and principal. A structured note replaces some of those payments with derivatives to provide a customized payoff based on the performance of an underlying index.


There are two primary types of structured notes - growth and yield notes.2 Growth notes provide exposure to the returns of an index, which may or may not be capped at a certain level, along with partial or complete downside protection.


A yield note targets an income stream that is typically higher than you might receive in traditional bonds, along with some downside protection. They typically do not offer any upside appreciation above the yield you may receive.


Most of these notes are issued by a bank and there are exchange-traded funds that offer similar strategies.


You should strongly consider the drawbacks3 before you purchase a structured note. Some of the drawbacks include liquidity, expenses, counterparty risk, index risk, and tax risk. While some structured notes provide partial or complete protection, please make sure you understand the terms of the note you purchase – all investments include risks. For example, if you sell a principal protected note prior to maturity, you could suffer a loss if the reference index has dropped in value.


Hedge Funds

Hedge Funds are financial partnerships that employ various strategies for their investors. Unlike most mutual fund managers, hedge fund managers typically have access to invest in a wide variety of assets and strategies. Hedge funds typically charge higher fees, offer limited liquidity, and the managers typically take a percentage of their profits (commonly referred to as performance-based fees). Hedge fund strategies include global macro, long short, relative value, and activist. You should be aware of the hedge fund strategy, fees, track record, and personnel before making an investment.


Private Equity Funds

Private equity funds are defined as a pool of money that a private equity firm uses to invest in private companies or special situations. Private equity funds are typically structured as a limited partnership, with the private equity firm acting as the general partner (GP) and the investors as limited partners. The GP's role includes evaluating potential investments and using the fund's capital to try to generate returns for the investors. These returns can come from a variety of strategies, such as improving operations or streamlining the capital structure. Private equity strategies include, but are not limited to, venture capital and leveraged buyout. Private equity funds are very illiquid and are typically considered for more long-term strategies.  It’s important to review the exit terms of private equity funds to fully understand terms and conditions associated with liquidity.


Private Credit

A private credit fund manager seeks to potentially earn a higher yield than might be available in the public credit markets by investing in non-publicly traded bonds. These higher yields come with extra risk, and it is the private credit manager’s job to manage that risk. Some private credit strategies are less liquid than traditional investments.


Real Assets

Real assets include real estate, infrastructure, natural resources, and commodities, such as gold and silver. Real assets can be a good way to diversify a portfolio because their returns may provide a buffer from stock market returns in down years, depending on what the real asset is. Some of the asset classes, such as real estate funds, may also offer some protection against inflation as they pass along higher prices to consumers.

 

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All advisory services are offered through Savvy Advisors, Inc. (“Savvy Advisors”), an investment advisor registered with the Securities and Exchange Commission (“SEC”).


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