Structured notes are complex financial products that often attract expat investors with their promise of higher returns and protection against downside risks.
However, like any investment, their performance can sometimes fall short of expectations.
If you find yourself wondering, “Why is my structured note performing so poorly?”, here are some potential reasons and factors to consider.
1. Market Conditions Have Changed
Structured notes are designed based on certain assumptions about market conditions, such as interest rates, stock market performance, or commodity prices.
If the market environment shifts significantly from the conditions anticipated at the time of issuance, it can adversely affect the performance of the structured note.
For instance, a note linked to the performance of a stock index might underperform if the market enters a bear phase.
2. Complexity Of The Product
The inherent complexity of structured notes can be a double-edged sword.
These products often involve intricate formulas to calculate returns, with caps on maximum gains and protection against losses up to a certain point.
If the note’s structure is not fully understood, it can lead to surprises about its performance under various scenarios.
3. Credit Risk
Structured notes are debt obligations of the issuer, which means their performance is also tied to the creditworthiness of the issuing financial institution.
If the issuer’s credit rating is downgraded or if there’s a perceived increase in credit risk, the value of the structured note can decline, irrespective of how well the underlying assets perform.
4. Fees and Costs
The costs associated with structured notes will eat into the potential returns.
These products usually come with higher fees than traditional investments, including structuring fees, distribution costs, and management fees.
High costs can significantly impact the net return to investors, especially in low-yield environments.
5. Limited Liquidity
Structured notes typically have limited liquidity compared to more straightforward securities like stocks or bonds.
If you need to sell the note before its maturity, you might find it difficult to do so without incurring a substantial loss.
The secondary market for structured notes can be thin, and the price at which you can sell may be much lower than its theoretical value.
6. Interest Rate Environment
For notes that are sensitive to interest rates, such as those linked to bond yields, the current interest rate environment can have a significant impact.
For example, if interest rates rise, the value of a note linked to long-term bond yields might decrease.
7. Path Dependency
Some structured notes have features that make their performance path-dependent; that is, the returns depend not just on the final outcome but also on the path taken to get there.
This can introduce additional unpredictability into the investment’s performance.
Conclusion
If your structured note is underperforming, it’s essential to revisit the reasons why you invested in the product in the first place and whether those reasons are still valid.
Consider the factors mentioned above and review the note’s terms and conditions.
It may also be beneficial to consult with a financial advisor to fully understand the nuances of your investment and to explore possible next steps.
Remember, all investments carry risk, and structured notes are no exception.
It’s crucial to align your investment choices with your overall financial goals, risk tolerance, and investment horizon.
Get In Touch
If you are an expat who has already invested in a structured note and would like an impartial second opinion, please get in touch for a free no-obligation 20-minute call.
