As investors seek ways to diversify their portfolios and potentially maximize returns,structured investment products—particularly structured notes—have garnered attention. These financial instruments offer unique opportunities, blending traditional investments with innovative strategies.

But what exactly are structured investment products, and are they worth considering for your portfolio?

In this article, we’ll explore what structured investments are, how they work, and whether they can be a smart investment choice. We’ll dive into the specifics of structured notes and investment vehicles, discuss their benefits and risks, and help you determine if they align with your investment goals.

What Are Structured Investment Products?

Structured investment products are pre-packaged investments that combine a traditional asset (like a bond orstock) with a derivative component (like an option) to create a customized investment solution. The objective is to provide features not available inconventional investments, including downside protection, enhanced yields, or targeted market exposure.

Investment banks or other financial institutions typically issue structured products. They can be tailored to align with specific investor priorities—whether that’s locking in principal,capturing upside, or broadening exposure to niche markets.

For high-net-worth individuals, structured products offer a level of customization and risk management that traditional investment vehicles often lack.

How Do Structured Investments Perform?

Structured investment products have historically offered moderate but consistent returns. According to industry data, U.S. structured products have generated average annualized returns of around 6.6%,with 90% of approximately 53,000 matured products turning a profit over anaverage holding period of just under two years.

In aggregate, these products yielded an average return of $111.56 for every $100 invested, out performing the $109.68 average from their underlying assets over the same period.

While the S&P 500 has averaged about 10% in annual returns over decades, structured notes are engineered to offer defined outcomes—such as buffered losses or capped upside—instead of pure market participation. That means they often trade off some upside potential in exchange for features like downside protection.

For example, consider a 20% barrier note. With this type of structured note, if the underlying asset drops 19%, you will retain 100% of your principal. However, if the underlying falls by even 21%, you will lose 21% of your principal, making it crucial to understand the level of risk you're willing to take on.

Alternatively, consider a note that offers 1.5 times upside participation. It could be linked to the MSCI Emerging Markets Index with 20% barrier protection on top. If the index increases by 30%, you achieve 1.5 times the growth, resulting in a 45% return. However, if the index falls by more than 20%, the principal protection feature would be activated.

Types of Structured Investment Products

Structured products are best viewed as complementary tools to traditional investments. In other words, they don’t replace traditional stock or bond investments. Still, they can serve as strategic buffers in diversified portfolios, especially for investors seeking tailored exposure and built-in safeguards in unpredictable markets.

Structured Notes

These are debt securities that combine a bond component with a derivative, usually linked tothe performance of an underlying asset, index, or market. Structured notes are highly flexible, offering fixed or variable returns depending on performance,with features such as principal protection, barriers, or caps.

For example,an equity-linked structured note might offer a fixed coupon payment, while the final return depends on the performance of a stock index. These notes can be designed with protective features, such as a 20% barrier or upside participation rates, aligning with various market views and risk tolerances.

Structured Investment Vehicles (SIVs)

SIVs are off-balance-sheet entities created to hold a portfolio of structured assets,such as asset-backed securities or mortgage-backed securities, and issue debt securities to fund their investments. SIVs often use leverage, meaning they borrow funds to amplify their investment capacity, which boosts potential returns but also raises risks.

SIVs are typically more complex and institutional in nature. These vehicles can be highly complex due to the structure of the assets they hold, the use of leverage, and the often opaque nature of their portfolios. HUDSONPOINT clients typically engage with structured notes tailored for accessibility,transparency, and strategic portfolio integration.

Collateralized Debt Obligations (CDOs)

CDOs are securities backed by a diversified pool of debt, which can include mortgages,loans, and other forms of credit. These debt instruments are then sliced into different tranches or segments, each offering varying levels of risk and return. The higher-rated tranches are typically safer but provide lower returns, while the lower-rated tranches carry higher risk but offer higher potential returns.

CDOs gained popularity as a way to securitize debt, but their complexity became evident during the financial crisis, particularly when the underlying assets, such as subprime mortgages, began to underperform. Despite this, CDOs are still used today as a way to provide investors with exposure to a diversified pool of debt while allowing for different levels of risk exposure.

Equity-Linked Notes (ELNs)

ELNs are a type of hybrid security that combines the characteristics of debt and equity investments. These structured products are tied to the performance of a particular equity or stock index, allowing investors to potentially earn returns based on the appreciation of those assets. Typically, ELNs offer a fixed coupon payment over the life of the note, and at maturity, the return is adjusted based on the performance of the linked equity asset.

They are commonly used by investors seeking exposure to equities with some downside protection, as the debt component offers some level of security. However, the returns are still subject to the volatility and risks of the underlying equities.

Other Structured Products

In addition to the more common structured notes, structured products can also encompass a wide range of lesser-known vehicles designed to meet specific investor needs or address particular market conditions. These may include products such as credit-linked notes (CLNs), which are tied to the credit risk of a specific borrower or entity, or hybrid securities that combine features of multiple asset classes.

For example,certain structured products may combine commodities with equities or incorporate derivatives, such as options, to enhance returns or hedge against risks. While these products are typically more specialized and complex, they offer investors flexibility in terms of both risk and potential return.

How Do Structured Investment Products Work?

Structured investment products are designed with customization in mind. They are often linked to the performance of a specific underlying asset—like stocks, bonds, commodities, or benchmark indices—and are designed with unique features that cater to bespoke and highly specific investment objectives.

The ‘Structure’ of Notes

At their core, structured products combine two key components: a fixed-income bond and a derivative. The bond element provides principal protection (in most cases) and a fixed return. The derivative component is used to generate returns based on the performance of the underlying asset, offering exposure to different asset classes or market movements.

For example, a structured note might offer a fixed bond-like return with the potential to earn additional returns based on the performance of a stock index. In this case, the investor receives their initial investment back at maturity along with any returns tied to the stock index’s performance, often with some form of cap or limit.

Underlying Assets

The underlying assets of a structured investment product can vary widely. They might include equity indices (such asthe S&P 500), individual stocks, commodities, or even foreign currencies.The performance of these assets directly impacts the returns that investors receive.

For example, a structured note could be tied to the performance of a basket of technology stocks or a commodity,such as gold. If the performance of these assets meets or exceeds certain thresholds, investors may earn a return on their investment.

Risk and Return

The risk and return profile of a structured investment product is dependent on its structure and underlying assets. On one hand, the fixed bond component typically offers a measure of principal protection, reducing risk compared to direct investments in volatile assets. On the other hand, the derivative component exposes the investor to more risk, especially if the underlying asset performs poorly.

Structured products can be designed to suit a range of risk appetites, from conservative investors seeking principal protection to those willing to take on more risk in pursuit of higher returns. It’s essential to note that, while principal protection is often a key feature,it's not guaranteed in all cases.

Interest Payments in Structured Notes

One of the main features of structured investment products, especially structured notes, is the potential for interest payments. These payments can vary depending on the product's structure and the performance of the underlying assets.

Fixed vs. Variable Interest Payments

Some structured products offer fixed interest payments, meaning the investor receives a predetermined amount of income throughout the life of the product. Other structured notes may offer variable interest payments that are linked to the performance of the underlying asset or index. For example, an equity-linked structured note might pay interest based on the annual return of a specific stock index.

When Do You Receive Interest?

Interest payments can be made periodically, such as quarterly or annually, or they might be paid as a lump sum at maturity. The frequency and structure of payments depend on the terms of the product. Some products may also offer interest payments that fluctuate based on the performance of the underlying asset, providing additional upside for investors in favorable market conditions.

Are Structured Investment Products Worth It?

Like any investment, structured investment products come with their own set of advantages and risks. Whether they are a good investment depends on your financial goals, risk tolerance, and market outlook. Below are key benefits and drawbacks to consider before investing in these products.

Benefits of StructuredInvestments

●    Customization and Flexibility:Structured products enable investors to tailor their investments to meet specific goals. Whether you're seeking enhanced returns, principal protection,or exposure to niche markets, structured products offer a level ofcustomization that traditional investments cannot match.

●    Potential for High Returns: Due to the derivative components, structured products have the potential to deliver higherreturns than traditional fixed-income investments. For example, a structured note linked to a basket of high-growth stocks could provide returns that exceed those of bonds or other income-generating investments.

●    Diversification: Investing in structured products can help diversify your portfolio by adding exposure to alternative assets or markets that might not be accessible through traditional investment channels. For instance, structured products can provide access to commodities,foreign currencies, or emerging markets, which can add variety and reduce overall portfolio risk.

●    Risk Management: Many structured products offer some degree of principal protection, meaning investors can recoup their original investment if the product doesn’t perform as expected.This makes them appealing to risk-averse investors who want to limit downside potential while still participating in market gains.

Drawbacks of Structured Investment Products

●    Inherent Complexity: Structured investment products can be very complex, often involving derivatives,underlying assets, and varying payoff structures. This degree of complexity makes them significantly harder to understand compared to traditional investments. They require a higher level of expertise to be evaluated effectively.

●    Lower Liquidity: One of the key drawbacks of structured products is their illiquidity. Unlike stocks and bonds,which can be traded on the open market, structured products typically have limited liquidity, meaning investors may not be able to sell them easily before maturity.

●    Counterparty Risk: Structured products are issued by financial institutions, which means there is a risk that the issuer could default. This risk is particularly significant for structured notes, where the investor’s return is contingent upon the financial health of the issuing institution.

When Do Structured Investment Products Make Sense?

Structured investment products can bea valuable addition to a diversified portfolio, particularly for investors seeking tailored investment strategies that offer higher returns, exposure to alternative assets, or principal protection.

However, due to their complexity,illiquidity, and counterparty risk, these products are best suited for experienced investors who fully understand their structures and risks.

Structured products may be particularly appealing if you're seeking customization, diversification, or exposure to niche markets that traditional investments cannot offer. Structured products may be particularly appealing if you're seeking customization,diversification, or exposure to niche markets that traditional investments cannot offer.

At HUDSONPOINT capital, we provide expert guidance on structured investments, helping you navigate the complexities of these products and access high-quality opportunities tailored to your financial goals.

‍