• The following outlines the benefits of structured vehicles and their importance in professional asset allocation.
• This information is aimed at asset managers looking to build comprehensive strategies to achieve various goals.
• FlexFunds offers an asset securitization program to enhance liquidity in structured products. For more information, feel free to contact our experts.

One of the most important functions in the financial sector is asset allocation. It directly influences the performance of investment portfolios and, consequently, client returns. In today’s world, one of the best ways to achieve this is through structured vehicles.

The role of structured vehicles in asset allocation

Asset allocation is a highly complex and integral task. Managers must divide capital across various assets and financial vehicles to optimize the risk-return relationship of a portfolio.

Structured vehicles are often essential in building asset allocation strategies because of the multiple benefits they offer.

Structured products enhance diversification without compromising liquidity or increasing risk.

Typical use cases for institutional investors

For institutional investors such as investment funds, banks, pension funds, and companies that professionally manage their finances, structured vehicles are typically used for three different strategies:

• Periodic income
• Capital preservation
• Alpha generation

Let’s break this down in more detail.

Periodic income

Investors requiring a constant cash flow, such as insurance companies, use structured vehicles focused on income.

These are designed to provide periodic payments, either through coupons (bonds), dividends (stocks), or contractual returns derived from the performance of another underlying asset.

A typical example is a structured vehicle based on a portfolio of mortgage loans. The repayment of these mortgages generates the required cash flow for the asset manager responsible for asset allocation.

In 2024, structured products focused on income generated significant returns. Of the 137 products of this type that matured, the average annualized return was 5.77% over an average period of 4.21 years.

Capital preservation

The capital preservation strategy aims to protect capital in a downturn. To achieve this, financial derivatives, such as put and call options, are often used.

While the level of protection can vary, it usually ranges from 65% to 100% of the initial investment. If a structured product provides full protection and the underlying asset (which could be a stock or index) performs poorly, the investor will still receive their initial capital in full.

Alpha generation

The alpha generation strategy is also very popular, aiming for returns superior to a specific benchmark.

It focuses on all types of financial assets, including derivatives like options and futures. This is why hedge funds are becoming increasingly popular.

A study by BNP Paribas detailed that 61% of over 200 asset allocators planned to increase their hedge fund portfolios by more than $30 billion, a 38% increase from 2024, as they achieved an alpha of 2.62%, compared to 0% in 2023.

How do we design vehicles that integrate into asset allocation logic?

Fortunately, many structured vehicles can be included in asset managers’ asset allocation strategies thanks to asset securitization. This process, carried out by FlexFunds, offers several advantages.

• Timelines. The investment vehicles (ETPs) developed by FlexFunds are ready to operate within 6 to 8 weeks.
• Liquidity. In addition, the ETPs come with their own ISIN/CUSIP codes, making them tradable via a conventional brokerage account. This way, asset managers reach a broader client base.
• Cash flow structuring based on portfolio objectives. FlexFunds, together with clients, can structure the cash flow based on the portfolio’s goals. That is, a portfolio is securitized with assets whose income aligns with the objectives and needs of the manager.
• Legal, tax, and underlying asset flexibility. The unique feature of FlexFunds products is their remarkable flexibility in terms of underlying assets.

ETPs can be traded worldwide and are carried out through a special purpose vehicle (SPV) registered in Ireland, one of the most stable jurisdictions in the financial sector.

Moreover, portfolios can contain all types of assets: stocks, bonds, loans, commodities, currencies, and, of course, structured products, among others.

What portfolio managers seek when incorporating structured vehicles

Portfolio managers, unlike retail investors, are looking for very specific benefits when incorporating structured vehicles:

Highly personalized exposure

Since portfolio managers oversee multiple portfolios, they need exposure to financial assets in a highly customized way. Structured vehicles allow them to do this by modulating the risk level, focusing exposure on specific sectors and geographies, and designing specific payment flows.

Tax and regulatory efficiency

Structured vehicles can have different jurisdictions with favorable tax treaties. Therefore, portfolio managers looking for tax and regulatory efficiency can create portfolios for their clients without complications in this regard.

Optimization of the risk-return profile

They are also used to maximize the risk-return relationship of portfolios. By combining financial assets with derivatives, exposure can be gained to a high potential return while also being protected from an eventual dangerous downturn.

To learn more about FlexFunds and our asset securitization process, you can contact our expert team. We’ll be glad to assist you!

Sources:

• https://www.idad.co.uk/optimal-portfolio-design-what-the-research-says-about-structured-products/
• https://ifamagazine.com/structured-products-sector-delivers-strong-returns-despite-market-uncertainty/
• https://www.moneyweb.co.za/moneyweb-podcasts/money-rules/is-it-time-to-consider-structured-products-in-your-investment-strategy/
• https://globalmarkets.cib.bnpparibas/coming-up-trumps-allocators-add-to-hedge-funds-as-alpha-rises/