Myth #5: Structured notes have no liquidity

Myth: Structured notes have no liquidity.

 

Reality: If I was to invest in our sample product (5% pa note linked to Apple), I would surely need to wait until the products maturity i.e. 12 months, to be able to have my money back. Or would I have a possibility to get out if I wanted to?

The perception of zero liquidity continues to hang over the structured products field

While perhaps 20 years ago it was the case that some of the issued products had no liquidity, the industry has evolved immensely when it comes to allowing investors to sell their positions before the product’s official redemption date

Let us consider the following scenarios, assuming I invest in the Apple-linked product today

a) I happily collect my first two coupons, but after 6 months I have an unforeseen capital expenditure for which I need to redeem the note.

b) I collect my first coupon but then come across another investment opportunity which I would not like to pass on.

c) Having collected my first coupon, I become increasingly concerned about the future of the overall economy and Apple itself.

 

Distributors and issuers of structured notes encounter these situations on a daily basis, so thousands of trades are processed in the secondary market, allowing investors to redeem their positions smoothly and stress-free.

 

As with any other investment, the value at which investors are able to sell back their structured notes will depend mainly on how well the underlying asset has performed since the start of the product.

 

In any of the cases described above, clients might be able to sell at a profit or at a loss in accordance to Apple’s performance.

 

There is now a vibrant and active secondary market in structured notes which allows investors to often exit positions at a gain before the official maturity. The same applies to the ability for investors to work with stop-losses. A regular portfolio review will very often detect such opportunities.

 

With structured notes, what investors need to be aware of is that beyond the performance of the underlying asset, there are other attributes which will affect the price of the product, such as interest rates and volatility.

 

Structured notes are a product type which should not be ignored on the false assumption of lack of liquidity. Suffice to say that throughout the market turbulences we witnessed in early 2020 with the outbreak of COVID, primary and secondary markets of notes remained unaffected, allowing clients to both engage into new trades and exit their existing ones.