A recent structured product that used an absolute return strategy as its underlying index matured with a 10% loss to investors (on the 90% capital guaranteed version of the product).
The underlying strategy developed by BNP Paribas has been used in several products. I have long considered the use of capital guarantees on absolute return strategies to be a very inefficient use of capital. Insurance against a loss on a strategy aimed at avoiding a loss.
In a forest, the absence of fires may on the surface appear to reflect very robust safety controls. But problems hide in the absence of stressors and as the brush gets thicker the resulting cumulative harm can manifest itself in devastating circumstances. Equally, a decaying bridge might deliver smooth and reliable performance until its structure fails.
Just as a woodsman would quickly figure out the dangers lurking in a forest with thick brush, an inspection of a bridge by an engineer could reveal its deficiencies before the structure collapses.
My point here is that on the surface we can view something as being safe, consistent and reliable, but without proper due diligence, dangers may be lurking .
The BNP Platinum Strategy appeared to offer consistent, reliable performance, but when you consider how these strategies are generated you begin to get a different understanding.
I am not sure that investors understand how some of these strategies are generated. If they did, they might well be more circumspect about them and less willing to accept the stunning ‘track records’ that accompany the marketing material.
Sophisticated investment banks that pedal strategies that are aimed at generating hefty fees and offer little prospect of a return should not be tolerated. Ask yourself the following:
Does this make sense?
Do I really know what the seller is trying to achieve?
What is the seller’s objective? Are we aligned?
Enough is enough. Time for common sense to prevail.
The underlying strategy developed by BNP Paribas has been used in several products. I have long considered the use of capital guarantees on absolute return strategies to be a very inefficient use of capital. Insurance against a loss on a strategy aimed at avoiding a loss.
In a forest, the absence of fires may on the surface appear to reflect very robust safety controls. But problems hide in the absence of stressors and as the brush gets thicker the resulting cumulative harm can manifest itself in devastating circumstances. Equally, a decaying bridge might deliver smooth and reliable performance until its structure fails.
Just as a woodsman would quickly figure out the dangers lurking in a forest with thick brush, an inspection of a bridge by an engineer could reveal its deficiencies before the structure collapses.
My point here is that on the surface we can view something as being safe, consistent and reliable, but without proper due diligence, dangers may be lurking .
The BNP Platinum Strategy appeared to offer consistent, reliable performance, but when you consider how these strategies are generated you begin to get a different understanding.
I am not sure that investors understand how some of these strategies are generated. If they did, they might well be more circumspect about them and less willing to accept the stunning ‘track records’ that accompany the marketing material.
Sophisticated investment banks that pedal strategies that are aimed at generating hefty fees and offer little prospect of a return should not be tolerated. Ask yourself the following:
Does this make sense?
Do I really know what the seller is trying to achieve?
What is the seller’s objective? Are we aligned?
Enough is enough. Time for common sense to prevail.