Structured products encompass a wide range of investment vehicles, although all of them have typically been designed to offer investors a customised risk-reward profile. How they achieve that can vary significantly depending on their target market.
Many retail structured products offer exposure to specific markets while limiting investors’ downside by offering some form of capital guarantee (using a combination of securities and derivatives). Different regions tend to display different levels of appetite for these products. In Germany and Switzerland, for example, there is sufficient investor appetite to merit a dedicated structured products exchange. Elsewhere products are typically traded OTC.
Products targeted at institutional or professional investors include fairly straightforward structures such as basket options (an option based on a customised basket of securities) and quantos (where the option and its underlying are priced and settled in different currencies) through to more complex ones such as CLOs and CDOs (as well as CDO2 and CDO3).
Although exchange traded funds are not typically included in the category of structured products, there are many funds (particularly those that offer leverage, inverse returns or achieve bespoke risk/reward profiles through the use of derivatives) that would fit the mould of a structured product.