Following the Brexit vote financial services firms with operations in the UK are considering moving out of the country and relocating to other European jurisdictions. This could play in the hands of smaller providers serving institutional and high net worth individuals which could fill the gap left by the tier one players in the domestic structured products market. SRP spoke to Pierre-Yves Breton (pictured), founding partner at French structured products specialist boutique HPC Investment Partners (HPC IP) which launched in the UK in late 2015, about the consequences of the result of the UK referendum for the firm and what opportunities are in focus.
"What we have seen after the Brexit vote brings memories of Lehman Brothers and the Swiss franc shock in January 2015 as markets have reacted in a similar way," says Breton. "Most markets have been very volatile since the outcome of the vote was public and the value of the main equity indices has fallen significantly. However, markets and investors have the experience of Lehman and we haven't seen the same level of panic in the market."
According to Breton, a number of clients reacted fast and begun trading the day after the results came in. "These were big trades which suggests that some investors are actually moving to trade tactically and opportunistically, or to enter positions at a low entry level," says Breton. "We did not see this kind of behaviour after Lehman or even after the collapse of the Swiss franc, and this shows a level of maturity from investors. Some investors out there seem to be more confident and are willing to take risks to capitalise on market volatility."
Breton believes that investors have learned the lessons from Lehman and rather than retreating from the market they are seeking to use structured products to participate in market moves. "Many of our clients were sitting on cash for many years, and we have seen some of those trading the morning after the event which was a pretty hectic time," says Breton. "We were also surprised to get quotes by the end of the morning with a number of clients also asking to reprice products that have been discussed earlier and other taking positions after the main equity indices went down."
At times of high volatility and uncertainty, investors want to hedge their portfolios "and also make the most of any opportunities the market offers", which resulted in a significant amount of requests for structured products with averaging to limit losses, according to Breton.
"After the Brexit vote there was a dislocation in the markets but we think this can also provide opportunities," says Breton. "You want to sell volatility when volatility is back, and although is not showing in the pricing it will eventually show. If markets continue to fall we should see new inflows into reverse convertibles and autocallable structures."
According to Breton, credit-linked notes (CLNs) are getting more traction especially those linked to well-known and liquid indices such as the iTrack. "We also see 'safe haven' assets such as gold getting some momentum as investors' hedge their positions," says Breton. "We have done in recent months a number of reverse convertibles linked to constant maturity swaps (CMS) and this shows that investors were struggling to position themselves in the equity market so they resorted to this kind of products as the potential yields were attractive and there was a rational behind. We think credit structures could also add value to clients' portfolios after months of low volatility."
The good thing about structured products, says Breton, is that at times of market turmoil they perform better than most asset classes. "There's no magic wand or product but they are flexible enough to extract value of well-performing assets, and can also be used to hedge portfolio's and add protection depending on the needs of the client," says Breton "It has been proven that in volatile markets some structured products outperform the market as you can sell puts and get good premium to buy upside. When volatility is expected to remain high for a long time it is better to invest straight away even if there's uncertainty around the timing because the chances for good yield out weight the risks of underperforming."
The Brexit vote will not change the firm's plans and the impact will be minimal as the firm has the back up of its mother-company, OTCex / HPC group, according to Breton. "Our plans remain in place and we still have two reps in London which will continue with our route map. We have seen many issuers of structured products including Societe Generale stating that they may leave the UK as a result of the Brexit vote but it is early days to make that kind of decision, and the UK remains an important market for any firm involved in the structured products segment."
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