Risks ofStructured Investments
As with any investment, there are always risks involved. When deciding whether a structured product is right for you some ofthe below risks should be considered by an investor:
Risk of 100% loss
Your return on investment is affected by the performance the asset underlying a structured product. There is no guarantee that an underlying asset will perform well. For leveraged structured investments, this would equate to a complete loss of the total investment cost plus any upfront fees included in the investment. However, notwithstanding this risk of 100% loss, it is important to note that the investor can never lose more than their Total Investment Cost. There is no risk that the investor will ever be required to repay the Loan Amount from the investor’s own funds in any circumstances.
Timing risks
The timing risks associated with leveraged DPAs is significant. This is because the Investment Term is fixed and the Reference Asset is required to at least generate some positive performance over and above the Break-Even Point by the time the Maturity Date arrives in order for the investor to generate a profit. The fact that the Reference Asset needs to generate a specified level of performance within a certain timeframe creates a very specific risk which investors need to understand and accept. This is very different to investing into managed funds and shares for example.
Credit Risk
Investors in structured products are subject to counterparty credit risk with respect to the Issuer and the Hedge Counterparty. Any such risk occurring is likely to adversely impact the value of your Units.
Risk of partial loss
(i.e. less than 100% loss) in relation to the Total Investment Cost which includes Prepaid Interest and Fees (including, the Application Fee (if any), Adviser Fee and any other fees). This will occur if the Performance Coupon at Maturity is positive but less than the Break-Even Point. The Break-Even Point will equate the Total Investment Cost. In other words, an investor will only generate a profit if the Performance Coupon at Maturity is greater than the Total Investment Cost.
Liquidity Risk
Subject to any adverse market conditions, the vast majority of investments into structured products with SSI can be unwound or redeemed before the Maturity Date. This is referred to in the relevant Termsheet PDS as an “Issuer Buy Back”. Regardless of the nature of a structured product, some form of derivative would be used by SSI to provide exposure to a given reference asset. This means that the value of the investment at the buyback period is governed by the value of the derivative. This carries certain risks for investors including:
- The derivative value is reduced by any margin earned by the underlying hedge provider/investment bank and the Issuer at the time the product is issued as well as at the time of the Issuer Buy back;
- potential differences between how the derivative value changes and how the Reference Asset performance changes during the Investment Term (before maturity). This is not a one-for-one relationship;
- the value of the derivative falling as the underlying Reference Asset falls;
- changes in volatility, interest rate or other market related factors impacting the value of the derivative; and
- potential illiquidity in relation to the derivative or underlying Reference Asset.