Also known as a market-linked product, a structured product is an investment approach that makes use of a carefully selected investment as the platform for generating some type of return. Often, this investment strategy is founded on the use of derivatives. In scope, structured products may include a selection of a single security, a collection of securities that are all of the same type, or an eclectic blend of commodities, debt issuances, currencies, and possibly swaps. The focus is less on the nature of the assets involved, and more on the selection of those assets for the purpose of setting the stage for earning a specific level of return.
It is important to note there is no hard and fast definition of what defines structured products. The variety of investments that may be included in the strategy, ranging from one to many, plus the establishment of the desired return leave a great deal of room for the process to take on many different forms. Often, it is easier to identify specific characteristics associated with the structured products approach.
One feature that structured products of any type tend to share is that the strategy is created and implemented to meet specific needs and goals of the investor. This goes beyond the broader goal of simply earning a return, and focuses on defining how much of a return should be generated within a given time frame. There is also some type of connection or relationship between the various securities, options, and commodities that are involved in the approach. This means that factors that tend to affect one of those holdings is also likely to exert an influence on the other holdings.
Investors may utilize a structured products approach as the main strategy in managing a portfolio, or include the process as one of several techniques that help to grow the assets contained within that portfolio. There are those that feel the use of this method does help to reduce some amount of risk exposure to the portfolio, depending on the selection of assets included and the goals set by the investor. Some analysts recommend using structured products as a two-pronged approach to investing, coupling the process with direct investment in other securities that are independent of the assets devoted to the structured product strategy.
While creating a structured products strategy does require careful planning, the process is not inherently less risky than other investment strategies. Investors still need to manage that risk by researching the backgrounds of the asset under consideration, evaluating their relationship with one another in the markets where they are traded, and determining if the degree of risk is outweighed by the potential return. As with any approach, accurate projections increase the chances for realizing the desired profit from the approach, while failure to project market movements and their impact on those assets may result in a loss.
