Credit Suisse, JPMorgan link to algorithms; structurer says strategy products a growth source

By Kenneth Lim

Boston, June 2 - Algorithm-based indexes continue to provide a growth sector for structured products as issuers seek to raise their competitiveness, a structurer said.

Those comments came after issuers launched a number of products linked to strategy-based indexes to open their June offerings.

Credit Suisse, through its Nassau branch, plans to price zero-coupon principal protected ProNotes due June 25, 2014 linked to the HS Market Neutral index powered by HOLT.

The payout at maturity will be par plus 100% to 115% of any index gain, with the exact participation rate to be set at pricing. Investors will receive at least par.

The index reflects the difference in return between two equally weighted sub-indexes, the Long Total Return index and the Short Total Return index. Each sub-index contains about 75 stocks listed in North America, Europe or Japan. To qualify for inclusion in the long index, stocks must be undervalued, have positive stock market momentum and display positive corporate performance. To qualify for inclusion in the short index, stocks must be overvalued, have negative stock market momentum and negative corporate performance.

JPMorgan Chase Bank, NA has two structured certificates of deposit in its stable, both being distributed by Incapital.

The first is a series of zero-coupon CDs due Dec. 31, 2013 linked to the JPMorgan Optimax Market-Neutral index.

The payout at maturity will be par plus at least 100% of any index gain, with the exact participation rate to be set at pricing. Investors will receive at least par.

The index references the value of a synthetic portfolio of 18 commodity constituents, each of which is a sub-index of the S&P GSCI index. Each month, the index is rebalanced and some volatility and diversification constraints are applied that will result in the index generally taking long synthetic positions in the constituents with positive estimated future returns and short synthetic positions in the constituents with negative estimated future returns.

The second JPMorgan product is a series of zero-coupon CDs due June 30, 2015 linked to the JPMorgan Efficiente (USD) index.

The payout at maturity will be par plus at least 100% of any index gain, with the exact participation rate to be set at pricing. Investors will receive at least par.

The Efficiente index seeks to generate return through a selection of up to nine indexes based on a modern portfolio theory approach to asset allocation. The index will identify weights for each index that will result in a hypothetical portfolio with the highest return over the previous six months while realizing an annualized volatility over the same period of 8% or less. The component indexes represent developed equity, global debt, emerging markets and alternative investments.

Asking for more rules

Algorithm-based indexes that try to replicate the returns of certain strategies are attracting a growing audience among investors, the structurer said.

"As investors become more familiar and comfortable with the concept of a structured product, I think that they're also increasingly realizing the possibilities that come with indexing," the structurer said.

Issuers can potentially come up with indexes that can seek to generate absolute returns while obeying constraints that investors desire, the structurer said. For example, an index could seek to provide returns while maintaining a diversified portfolio and staying within a certain range of volatility.

"The possibilities are limited by the investors' imagination and our math," the structurer said. "And we have some of the brightest minds working on this."

Getting an edge

The so-called "smart indexes" can help to give an issuer a competitive edge, the structurer said.

"That index becomes a proprietary asset for us," the structurer said. "Another point is that we can leverage off our bank's expertise in certain spaces to come up with an effective trading strategy and then offer that expertise to investors in ways that we couldn't or didn't think of doing previously. That's valuable to investors."

Indexes that can offer fund-like returns can also help the issuers reach into new markets through structured products. Products that substitute an index for a fund manager can be cheaper and allow more investors to sign on, the structurer said.

"A lot of retail investors just don't have any means to access the strategies that are used by many hedge funds," the structurer said. "If we can bring those strategies to every investor through an index, we're creating a new playing field."

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