Exceed Investments has diversified its offering over the last two years in a move to go beyond the structured products market and capitalise on new opportunities around the US define outcomes segment. Following the launch of the Catalyst Exceed Defined Risk Fund, SRP spoke to the firm's chief executive, Joe Halpern (pictured), about the increased activity in the unit investment trust (UIT) segment as a result of regulatory uncertainty, what issuer platforms can offer to US retail investors and what products will remain in focus for the remaining of the year.

"We recently launched in partnership with Catalyst Funds, a product based on a buffer rolling structured note with a 150% participation on the performance of the S&P 500 with 10% downside protection," says Halpern, adding that the fund uses a process similar to structured notes and fixed and variable indexed annuities, and comprises four options which are laddered and rolled. "Each of these options series seek to provide a buffered return on the S&P 500, similar in many aspects to a structured note."

The fund seeks to track the Nasdaq Exceed Defined Hedge Index by investing in components of the index and uses put and call options to implement the strategy. The Nasdaq Exceed Defined Hedge Index is the latest addition to Exceed's suite of indices that were co-launched with Nasdaq in September 2014, all of which comprise diversified rolling baskets of investment grade fixed-income securities and exchange-traded options linked to the S&P 500 and seek conservative, moderate or aggressive defined outcomes.

According to Halpern, Exceed has been working on a number of ideas and partnered with Catalyst to strengthen its distribution capabilities and overall offering in the mutual fund segment.

"We have two funds that follow two of our three indexes launched in partnership with the Nasdaq in 2014 (Exprot, Exhedg, Exenha)," says Halpern. The firm's most conservative strategy seeks to provide a limit on downside exposure to the S&P 500 to 12.5% in return for participation to a cap of 15% on an annual basis; the moderate option, which looks very similar to a structured note, seeks to provide a 10% buffer on the S&P 500 in return for 150% participation up to a cap on an annual basis; while the most aggressive play seeks to provide 2X up and 1x down on the S&P 500, according to Halpern.

"All of our products are comprised of rolling baskets of diversified investment grade fixed-income securities and exchange-traded options linked to the S&P 500 in creating a perpetual structured note like exposure," says Halpern. "These products are targeted at investors seeking the definition that structured notes provide but with increased liquidity, mitigated credit risk and standardization allowing for easier implementation within model portfolios and wrap accounts. Essentially marrying structured notes with mutual funds and hopefully capturing the best attributes of both."

Halpern points that in terms of investor demand, autocalls remain in focus in the US market and are very popular "given their enhanced yield which is something investors and advisors are actively seeking out in the [current] extremely low yield environment.

"They have taken over the mantle from reverse convertibles which have received a bit more negative attention - actually autocalls are able to provide a higher headline yield which simply means there is more risk underneath the hood," says Halpern. "Investors also appreciate that they have a level of protection even if the market goes down. Though it is important to understand the risks associated to autocalls as a larger market decline will drag down performance, in some cases materially."

In terms of underlyings, the equities market and cap weighted indices continue to drive most of the activity but other strategy and Eficiente-type of products and indices (JP Morgan's Eficiente) have also had success in the market, according to Halpern.

"These indexes are able to provide uncapped returns due to a much lower underlying volatility," he says. "These products do come with complexity however and believe it is important that investors are properly educated especially given that the products are finding their way into a lot of long-term structures such as CDs and indexed annuities."

Despite some believing the US structured products market would see the demise of the reverse convertible payoff in 2012, the market has continued to sell these structure types although since then the knockout payoff type has crawled to the top of the issuance rankings as the structure of choice in the retail market mainly in combination with other payoff profiles such as reverse convertible, capped calls, as well as enhanced and protected trackers.

In 2012 there were twice as many reverse convertibles (2,940 products) as a stand-alone offering as any other payoff in the US market whereas in 2016 reverse convertible made up a fraction of the overall offering in the US retail market (351 products). Year to date, no reverse convertibles have been recorded in the US market, according to SRP data.

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