A fund derivative is a financial structured product related to a
fund, normally using the underlying fund to determine the payoff. This may be a
private equity fund,
mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV ...
or
hedge fund
A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as s ...
. Purchasers obtain exposure to the underlying fund (or funds) whilst improving their risk profile over a direct investment.
Example
For example, the purchaser may be attracted by a fund's star manager, performance history or strategy, whilst improving their counter-party risk and getting leverage, currency hedging or a
capital guarantee via the derivative.
Features
The structured product may be investible by retail clients or institutional investors that would not otherwise buy the fund, because of its provision of safeguard features such as capital guarantees or the appointment of independent administrators to calculate the underlying fund's value and additional oversight mechanisms.
Types
Typical fund derivatives might be a
call option on a fund, a
CPPI on a fund, or a leveraged note on a fund. More complicated structures might include auto-call features guaranteeing that if the derivative reached a certain value that value was locked in, on top of an initial minimum value guarantee at issuance. Maturities might range from three to ten years or multiple decades. The big players in this field are investment banks such as
Barclays Investment Bank
Barclays () is a British multinational universal bank, headquartered in London, England. Barclays operates as two divisions, Barclays UK and Barclays International, supported by a service company, Barclays Execution Services.
Barclays traces ...
,
BNP Paribas, TPG,
Citigroup,
Credit Suisse,
Deutsche Bank
Deutsche Bank AG (), sometimes referred to simply as Deutsche, is a German multinational investment bank and financial services company headquartered in Frankfurt, Germany, and dual-listed on the Frankfurt Stock Exchange and the New York Sto ...
,
Goldman Sachs,
Macquarie Group,
Morgan Stanley
Morgan Stanley is an American multinational investment management and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in more than 41 countries and more than 75,000 employees, the fir ...
,
Société Générale
Société Générale S.A. (), colloquially known in English as SocGen (), is a French-based multinational financial services company founded in 1864, registered in downtown Paris and headquartered nearby in La Défense.
Société Générale ...
,
UBS Investment Bank
UBS Group AG is a multinational Investment banking, investment bank and financial services company founded and based in Switzerland. Co-headquartered in the cities of Zürich and Basel, it maintains a presence in all major financial centres ...
.
Fund derivatives have had explosive growth over the past 10 years but are still a major growth area. New structures are constantly being developed to suit market and client opportunities.
External links
Fund-linked DerivativesDerivative Funds UseageNomura wins Silver Award for Best Hedge-Fund Linked Certificate
Private equity
Derivatives (finance)
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