Credit Suisse’s notes on CS RavenPack AIS offer alternative investment, full protection

By Emma Trincal

New York, Jan. 30 – Credit Suisse AG, London Branch’s $268,000 of 0% CS notes due Jan. 31, 2024 linked to the Credit Suisse RavenPack AIS Balanced 5% ER index provide conservative investors with an alternate exposure to the market with 100% in capital protection, sources said.

The payout at maturity will be par plus 136% of any index gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls, investors will receive par.

News-driven, momentum play

The underlying index is based on a momentum strategy defined by an algorithm developed by RavenPack for the equity portion of the synthetic portfolio. The other portion consists of U.S. Treasury notes futures.

The Credit Suisse RavenPack AIS index selects sub-indexes of the S&P 500 index based on the RavenPack algorithm, which assigns scores to news items. The index selects the most “relevant” and “novel” news items with significant positive or negative sentiments in relation to companies’ earnings.

The index periodically rebalances its portfolio quarterly in order to achieve a realized volatility target of 5%.

Volatility control

“As always it’s all about how this note may fit into your allocation,” said Steve Doucette, financial adviser at Proctor Financial.

“You get an equity-like return but it may be dampened by the vol. control component.”

The volatility-targeting feature could cause the index to “significantly underperform” in rising equity markets, the prospectus warned in its risk section.

“On the other hand, you get equity returns with a lot less volatility. So, in bear markets, you may outperform,” he said.

Performance

In 2018 when the S&P 500 index was down 4.45%, the Credit Suisse RavenPack AIS Balanced 5% ER index declined by less than 1%, according to an underlying supplement filed with the SEC.

The same prospectus showed a back-testing return of 8.58% in 2011 when the broader benchmark rose by only 2.06%. On the other hand, in strong bull markets such as last year, which saw the S&P 500 index surge by nearly 30%, the underlying only returned 10.65%.

The back-tested data is shown from Sept. 2, 2005 to Oct. 6, 2017, which was the launch date of the index.

Allocation

“You get the full principal protection. In that way it may be used as a replacement for a bond exposure,” said Doucette.

“However, you have to be comfortable with it.

“You could put it in your equity allocation too as long as investors understand they may underperform the broader market.

“If you have clients who are a little bit more bearish and who want no risk of principal, it could make sense.

“You still have to do your due diligence. It is an algorithm and it’s a relatively recent one.

“Personally, I have yet to see a quant model that has outperformed for more than two or three years.

“What back-testing shows and what the market actually ends up doing are two different things.”

Terms

Another financial adviser pointed to the attractive terms of the structure.

“The index is not correlated to the market. You get full principal-protection,” he said.

“And if you may get lower returns due to the lower risk, you have a strong kicker to make up for it.”

Black box

The main drawback however was the underlying itself.

“It’s only been out there for a couple of years so you don’t really have a good track-record,” he said.

“How the market responds to news items today may change in the future.”

Also, the details of the allocation and rebalancing are not totally clear to a retail investor.

“It is a black box. You have to rely on a model,” he said.

Cheaper hedge

But the fee, which the prospectus said was 0.4%, was a very appealing aspect of the deal.

“Ten basis points a year is incredibly inexpensive,” he said.

The notes, he added, could find a place in the alternative investment bucket of a portfolio.

“It’s far cheaper than a hedge fund. The hedge fund is also designed to lower volatility but it might not get you the floor.

“I see this as a lower-risk way to get access to an alternative strategy that it’s not correlated to the S&P.

“The real concern, I guess, would be to get zero return, in which case you would have been better off with liquid assets.”

Credit Suisse Securities (USA) LLC is the agent.

The notes (Cusip: 22551NHB5) will settle on Friday.

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