Structured Products for International Investors

What Are Structured Products?

Structured products are pre-packaged investment instruments whose performance is linked to an underlying asset — commonly an equity index, basket of shares, interest rate, or commodity — through a combination of conventional debt and financial derivatives. They are typically issued by investment banks and designed to offer a specific payoff profile: for example, participation in equity market growth with capital protection at maturity, or enhanced income with conditional downside exposure.

The term "structured product" covers an extremely wide range of instruments. At one end of the spectrum are simple capital-protected notes with modest upside participation; at the other end are complex multi-barrier products with path-dependent payoffs that few investors can accurately value.

For international HNW investors, structured products can be valuable in targeted circumstances — but require careful evaluation of counterparty risk, the true cost of any "protection," and liquidity limitations.

The Building Blocks: How Structured Products Work

Most capital-protected structured products are constructed using two elements:

1. Zero-coupon bond: The issuer invests most of the initial capital (say, 85% of a 5-year product) in a zero-coupon bond that will grow to 100% at maturity. This provides the capital guarantee component. The exact amount needed depends on prevailing interest rates — in low rate environments, more capital is needed to "afford" the guarantee, leaving less for the growth component.

2. Options: The remaining capital (~15% in the above example) purchases call options (or other derivative payoffs) on the underlying asset. The options provide the participation in any upside. The higher current interest rates, the more efficient capital-protected products become — more capital is freed for options after funding the zero-coupon component.

This construction means that the "capital guarantee" is:

• Conditional on the issuer's solvency at maturity
• A nominal, not real, guarantee (no inflation protection)
• Subject to opportunity cost — your capital could have been invested elsewhere

Understanding this construction also clarifies that "capital-protected" products are not magic: they trade upside participation for downside protection. In return for getting your capital back in a flat or falling market, you give up some of the gains in a rising market.

Key Product Types

Capital-protected notes: Pay back 100% (or sometimes a lower floor, e.g., 90%) of initial investment at maturity regardless of the underlying's performance, plus a proportion (the "participation rate") of any upside. Participation rates of 80–110% are typical depending on the underlying, term, and interest rate environment. Higher participation rates cost more — they are only achievable by accepting a lower capital protection floor.

Growth notes (no capital protection): Instead of protecting capital, these products redirect the full capital into options, potentially offering participation rates of 150–200% or more in the underlying's upside, but with full downside exposure on maturity.

Autocallables: Among the most widely distributed products in recent years. The product "calls" — terminates early at a premium — if the underlying (usually a stock index) is above its starting level on periodic observation dates (monthly or quarterly). If not called, a barrier applies at maturity: if the index falls below a specified level (typically 50–70% of initial value), the investor absorbs the loss dollar-for-dollar. Autocalls typically offer higher income or premium than capital-protected notes in exchange for this conditional downside.

Reverse convertibles: Generate high headline income (coupons of 8–15% per annum are achievable in some market conditions), but the investor receives either cash at maturity or a fixed number of shares in an underlying company, whichever is worse. If the company's share price has fallen, the investor receives shares worth less than original capital. These are income-generating instruments with meaningful equity downside.

Market-linked deposits: Bank deposits whose return is linked to the performance of an underlying index or rate. Regulated as deposits, they carry the bank's depositor protection scheme coverage (typically up to a fixed limit), making counterparty risk lower than for unsecured notes. Trade-off is lower participation rates or caps.

Counterparty Risk: The Lehman Lesson

The single most important risk to understand in any structured product is counterparty risk. A standard structured product is an unsecured senior debt obligation of the issuing bank. The investor is, in effect, a creditor of that bank. If the bank becomes insolvent, the investor ranks alongside other unsecured creditors — generally receiving cents on the dollar, or nothing, after secured creditors and regulatory recovery.

The Lehman Brothers collapse in September 2008 resulted in hundreds of millions of pounds of losses for retail and HNW investors in Lehman-issued structured products, including some that had been sold as "capital-guaranteed." The collapse happened mid-term — the capital guarantee only applied at maturity, by which time the issuer no longer existed.

Mitigating counterparty risk in structured products:

• Issuer selection: Prefer government-owned or systematically important banks with strong credit ratings (AA-rated issuers carry lower default risk than BBB-rated issuers).
• Diversification across issuers: If allocating meaningfully to structured products, spread across multiple issuers rather than concentrating in one.
• Secured structures: Some products use UCITS funds or segregated cell structures where assets are legally held separately from the issuer's estate. These provide protection the standard unsecured note structure does not.
• Credit default swap spreads: The CDS spread on the issuing bank's debt is a real-time market indicator of perceived default risk — higher spreads indicate higher perceived counterparty risk.

Liquidity Limitations

Structured products typically have a stated maturity date (commonly 3–6 years). While secondary market prices are usually quoted by the issuer, this secondary market is not guaranteed and can dry up in periods of market stress.

Selling before maturity typically means accepting a price below par, even if the underlying asset has performed well. This occurs because:

• The option value within the product may be priced differently from a standalone option
• The issuer applies a bid-offer spread
• The market may be pricing in increased counterparty risk

Investors in structured products should treat them as investments intended to be held to maturity. Capital that may be needed within the product's term should not be allocated to structured products.

The Real Cost of Protection

The cost of "protection" in a capital-protected product is not always transparent. Rather than charging an upfront fee, the cost is embedded in the participation rate: a product offering 75% participation in an index's upside is cheaper than one offering 100% participation, reflecting the difference in option cost.

In high-interest-rate environments, the cost of capital protection falls because less capital is needed to fund the zero-coupon component, leaving more for options. In low-rate environments (such as 2015–2021), capital-protected products became extremely expensive to construct, pushing participation rates down to 50–60% or lower. The interest rate environment at the time of purchase materially affects value.

Fee disclosure on structured products has improved under the PRIIPs regime, which requires manufacturers to provide a Key Information Document (KID) including a summary cost indicator and scenario analysis. In the UK, the onshored PRIIPs rules are being replaced by the FCA's Consumer Composite Investments (CCI) regime, which introduces a new Product Summary disclosure — its use is optional from April 2026 and mandatory from June 2027, after which PRIIPs KIDs will no longer be accepted. Reading the KID (or Product Summary) before investing in any structured product is advisable.

When Structured Products Make Sense

Structured products have a legitimate role in specific circumstances:

• Genuine capital preservation requirement with equity market participation: An investor with a defined event (retirement, large payment) in 5 years may value the certainty of capital return while retaining some equity upside.
• Income generation in specific market conditions: Autocalls with well-set barriers can generate attractive income when equity markets are range-bound or modestly positive — which is often the most likely scenario over any given 3-year period.
• Specific market access: Structured products can provide efficient access to exposures (e.g., implied volatility, specific commodity curves) that are otherwise hard to access at retail level.

What structured products are not appropriate for: investors who do not understand the payoff structure; situations where capital may be needed before maturity; cases where the same exposure could be achieved more cheaply through a combination of standard instruments; or investors who do not understand or cannot accept the counterparty risk.

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This guide is for general information only and does not constitute regulated investment advice. The value of investments can fall as well as rise and you may get back less than you invest. Structured products are complex instruments and may not be appropriate for all investors. Counterparty risk means capital may be at risk even in "protected" structures. Past performance is not a guide to future returns. Tax treatment depends on individual circumstances and the laws of multiple jurisdictions, which may change. Always seek independent regulated advice before making investment decisions.

How Global Investments can help

Global Investments works with HNW clients to evaluate structured products objectively — assessing whether the product's payoff profile genuinely suits the client's needs, comparing the cost of protection against alternatives, and scrutinising issuer credit quality. We do not receive enhanced remuneration for placing clients in structured products, which allows us to advise independently on their suitability. Contact us to discuss structured product allocation.