Anyone ever heard of this independant financial brokers. Never dealt with them but ironically they are pushing Morgan Stanley notes at 10% guartees. This to me is obnoxious and regarless of equity performance how can they guarentee 10% returns with minimal risk. If such a thing was guarenteed, I would assume most value investors including hedge funds and fund of fund managers will jump in. I will be doing calls today and call MS directly and email them to find out which structured note if any they are pushing claiming guarentee 10% returns. Do infer fellas for I am surprised and wihout a caveat clause do smell porkie…
sounds fishy. there is no 10% guarantee on anything.
You can only gurantee superior investment returns if you’re a CFA.
I’m going to have to report you…for using CFA as a noun.
You should watch the movie Tommy Boy, very good info there about ‘guarantees’.
There’s nothing wrong here imo, I’m guessing you just haven’t properly read the termsheet. These ‘guarantees’ are usually subject to specific circumstances/constraints (i.e. issuer credit, market performance, term, etc.). If they’re not properly disclosing the risks, then yes, that’s a problem.
I’m the most CFA-iest CFA you’ve ever seen. I’m above the law.
There are guaranteed security type investments (more popular in Europe) but I don’t think any of them yield 10%. The one’s I’m familiar with are basically call options with no downside risk – you’re guaranteed 100% of your capital back, and retain a portion of any upside (usually linked to an equity index, but I think they’re available in commodities), but have to lock in your money for 5 years or something.
no way you can be guarantee 10% on a major scale…
If there was a way to guarantee 10% my DB clients wouldn’t be freaking out trying to make 7.5% every year.
“Offshore” investment brokerage.
Administration office in Malta.
Registered in Nevis
Products offered via Guernsey and Jersey
Hmmmm…not sure about guarantees offered by such an opaque organisation
“Offshore” investment brokerage.
Administration office in Malta.
Registered in Nevis
Products offered via Guernsey and Jersey
Hmmmm…not sure about guarantees offered by such an opaque organisation
I am actually an expert on such products and can probably tell you exactly how it is valued… Is there a term sheet or something?
If there is a 10% guarantee, most likely they lock in the money for X number of years. Highly unlikely that it is 10% yearly yield, unless the underlying credit is really terrible (which is unlikely for this sort of product).
The only way you get 10% guaranteed (nominally) is if inflation is near 10%. At below 2%, you ain’ gettin’ nothin’ close to 10% guaranteed annually, even if the funds are locked for half a century.
This is the thing guys. I just got their new november note they are still pulling the same nonsense of USD 2.35% returns per quarter or 9.2% p.a. Below I have attached through a link the term sheet and note itself…Should be interesting for I have not being able to see how did they come up with that figure. Do let me know all. Thanks
Um, did you read the ‘key risks’ portion? Credit, market, and duration risk. That 10% is not high enough compensation for those risks, I’m sure. You’re selling otm puts for less than market.
I think you’re on to something here. But I’m having trouble putting together the replicating portfolio that catches the mispricing. Can you help think that through?
I cannot access this at work… I guess I will try at home. It is worth mentioning that structured notes almost always disclose “key risks”, even for not-so-significant factors.
The payoff is that of a down and out put option, it’s basically the same as selling otm put spreads. The investor is selling those put spreads for less than market and MS is ‘buying’ them at a discount.
I can almost guarantee Yonis is better off selling naked puts on those indices. There’s no mispricing here, except in the sense that MS is buying something for less than it’s worth (and they charge a fee for this) in exchange for providing a client the exposure they desire. The investor has no way of capitalizing on this, it’s a one way street.
…and if Devere Group charges an additional fee on top of that then it’s an even worse deal.
Ok so, this is actually a pretty exotic structure. The payoff is specified quite clearly in the term sheet, but basically, you only get a coupon if all three indexes (UKX, SPX, SX5E) are above some % (60% to 70% depending on the index) of their initial prices. Furthermore, the % of your principal that you get back at maturity reflects the worst performing of these three indexes. This is actually pretty complicated to model and it is unlikely that the intended customer will be able to replicate this payoff by themselves.
Also disclosed: you pay a 4% fee up front to Morgan Stanley. They also need a pretty sophisticated trading desk to hedge this structure. I’m fairly certain that they will take at least 1% in mid-offer spread on the exotic option. So assume you lose 5%+ automatically. For a 3-5 year note, you can interpret yourself if this is good or bad.
As for risks: the biggest risk appears to be equity risk, through the “worst of” knock-in put at the end, and the “worst of” knock out coupons. You are also subject to MS credit risk, but I think they will still be around in 3-5 years. Incidentally, worse credit of the debt issuer usually gives you better terms on the optionality. Worse credit cheapens the bond you are buying, thus allowing the issuer to use more of your money to spend on optionality.
bromion is correct that this sort of product is more popular in Europe. The French banks (Soc Gen, BNP Paribas), in particular, are very active is exotic equity derivatives.
Edit: Upon closer examination, it looks like the 4% fee is paid to the distributor - Devere Group, in this case. Morgan Stanley, as the structurer, will definitely impose additional costs. The structuring costs are not typically disclosed in the term sheet. However, they are available in a separate, longer document called the “Terms and Disclosure”.
Yes, looks pretty risky to me. Both coupon & principal redemption are dependent on performance of underlying indices. And investor doesn’t enjoy upside on underlying indices, i.e. maximum recovery is 100% of principal.