Playing Ball
Structured notes, a seemingly obscure slice of the alternative space, are actually a $3 trillion global market with sales on track for a record year in the U.S., according to Mike Tims, CEO of mtn-i, a London-based media company that follows the structured note and private placement industries.
Structured investments are notes or CDs with specific payout profiles based on the performance of a variety of underlying asset classes, and they are payable at maturity. Underlying assets can include equities, commodities, foreign exchange and products tied to the Libor rate that banks charge each other for loans.
"It's a way for investors to get exposure to various asset classes they normally might not have easy access to," said Jason Wilson, executive director of Incapital LLC, a distributor of fixed income and structured note products in Chicago and Boca Raton, Fla.
Among the selling points of structured products is that they give investors exposure to different types of asset classes without holding the underlying securities. They also protect principal (upon maturity) and tailor risk to the individual investor.
Their risks include the credit risk of the issuer, their lack of transparency and a lack of principal protection until maturity. Also, they are complicated vehicles.
"Some of the feedback we got [at the conference] is that some advisors are familiar with [structured products] and have experience with it, but they've struggled to fully understand it, so the more information and education they can get the better," Wilson said.
Wilson's boss, Incapital CEO Tom Ricketts, spoke at one conference luncheon about perhaps the most "alternative" investment covered during the conference-his family's purchase of the Chicago Cubs from its former owners, the Tribune Co. The Ricketts family (Tom Ricketts' father founded Ameritrade, now known as TD Ameritrade) last summer finalized the deal to buy the Cubs, Wrigley Field and a 25% stake in a local cable sports network for about $850 million.
Tom Ricketts, the team's chairman, described the arduous path to ownerdom, including a two-year bidding process and 300 official documents requiring 6,500 signatures. The family also conducted the transaction at a time when the markets were tanking and the Tribune Co. filed for bankruptcy.
"We were dealing with the insanity of the process of buying the team along with the insanity of the markets," Ricketts said.
The Ricketts' family wealth is estimated to be roughly $1 billion, which means the deal required a lot of debt financing. And on face value, the investment appears to represent a huge percentage of the family's overall portfolio.
Otherwise, the speakers at the conference were focusing on less lofty and more normal allocations to alternatives. "We recommend 10% to 40% for clients, depending on their risk tolerance," said Robert Mileff, director of alternative investments at Fortigent, a provider of wealth management solutions in Rockville, Md. "Most are somewhere in the middle."
Statistical long-term performance suggests an allocation of up to 40% across a range of alternative investments will create a well-diversified portfolio along with sufficient levels of equities and fixed income, Mileff said.