Structured products are hybrid financial instruments that combine traditional bonds with derivatives, offering custom return profiles that can help preserve capital, increase income or access market-linked returns while managing downside risks.
As a result, they’re gaining more and more attention among high-net-worth individuals in Dubai who are looking for bespoke investment opportunities.
At MHG Wealth, structured products form an integral part of our diversified, client-centric wealth management strategies.
In this article, we’ll cover how:
- Structured products combine bonds and derivatives to create customised investment solutions that align with financial goals and risk exposure.
- These products cater to high-net-worth individuals seeking capital preservation, diversified income and market-linked returns.
- MHG Wealth integrates structured products into personalised wealth management strategies, leveraging global issuers and DIFC-regulated platforms.
What Are Structured Products?
Structured products are pre-packaged investments that blend fixed-income instruments, like bonds, with derivative components, such as options.
The bond component provides a level of capital protection, while the derivative portion offers exposure to various asset classes like equities, interest rates, commodities, FX or multi-asset baskets. The result is a bespoke investment that aligns with your financial goals and the level of risk you’re willing to take.
These products aren’t traded on standard exchanges. Instead, they’re issued by financial institutions, usually with a fixed term and a clearly defined payoff formula based on the performance of an underlying asset or basket.
Common Structured Product Types & Strategies
There are several structured product formats, each designed to suit different investor needs:
- Principal-protected notes: These offer capital preservation at maturity, with potential upside linked to market performance.
- Yield-enhancement products: Instruments like reverse convertibles or range accrual notes offer higher returns, typically with capped gains and partial risk to capital.
- Buffered or defined outcome structures: These provide a cushion against losses up to a predetermined level (e.g. 10% or 20%) while enabling participation in upside gains.
- Auto-callable or kick-out products: These are automatically redeemed if certain market conditions are met, offering high potential returns over shorter periods.
Each type has its own risk-return dynamics, and the selection depends on the investor’s strategy and market view.
How Structured Products Work
Structured products are built by combining two key components: a bond element that provides full or partial capital protection, and a derivative element, often in the form of an option, that determines how returns are linked to the performance of an underlying asset.
These investments are issued with a fixed maturity period, typically ranging from several months to a few years. The return at maturity is calculated based on specific conditions set at the outset.
For instance, a product might deliver a positive return if an equity index remains within a designated range or reaches a target level during the term. Some products go a step further by incorporating advanced quantitative structuring, using mathematical models to fine-tune the balance between risk and potential reward.
Are Structured Products a Good Investment?
So, you know what they are, but are structured products a good investment for you?
The answer depends on your financial goals, risk tolerance and investment timeline. Structured products can be great for investors seeking a balance between capital protection and market-linked returns. They’re also useful for high-net-worth individuals looking to diversify beyond traditional stocks and bonds, or for those who want exposure to specific market scenarios.
For example, if you’re looking for downside protection with a defined potential upside, structured products can provide that clarity. They can also generate alternative income streams, especially in uncertain or low-yield environments. However, they do come with complexity and are often less liquid than more conventional investments. It’s also important to consider the creditworthiness of the issuing institution, as your returns and capital may depend on their ability to meet obligations.
Ultimately, structured products can be a smart part of a broader portfolio, especially when used strategically under expert guidance.
Benefits for High-Net-Worth Investors
Structured products can fit right into a well-rounded portfolio, particularly for high-net-worth individuals:
- Capital preservation: Many products offer full or partial protection, which makes them appealing for conservative investors.
- Customised risk-return: Investors can fine-tune exposure to specific markets while managing risks.
- Diversification: Gain access to alternative asset classes and global market exposures that may not be available through traditional investments.
- Alternative income: Certain products generate attractive yields independent of the equity or bond markets.
These benefits are particularly relevant in uncertain markets, where traditional asset classes may not provide the desired balance of risk and return.
Key Risks & Considerations
While structured products offer flexibility, they’re not without risks:
- Credit and counterparty risk: The product’s performance and capital security depend on the issuer’s financial stability.
- Liquidity constraints: Secondary markets for these instruments are limited, which can make early exit challenging.
- Complexity: Understanding pricing mechanisms and payoff scenarios can be difficult for non-expert investors.
- Model risk: Returns are based on assumptions and financial modelling that may not reflect real-world performance.
Investors must understand these trade-offs and work with experienced advisors to ensure they’re suitable.
Regulatory Environment & Compliance in Dubai
Structured products offered in Dubai are typically regulated by the Dubai Financial Services Authority (DFSA) under the Dubai International Financial Centre (DIFC) framework. This ensures products are developed and marketed in compliance with strict disclosure, risk assessment and investor suitability rules.
The DIFC mandates comprehensive documentation (similar to PRIIPs in Europe) and requires firms to assess clients’ understanding and financial capacity before recommending complex investments.
How MHG Wealth Integrates Structured Products into Wealth Management
At MHG Wealth, structured products are never off-the-shelf solutions. We design them to suit your goals, risk appetite and investment horizon.
Through our access to top-tier global issuers and DIFC-regulated platforms, we offer structured notes that can be integrated seamlessly into your portfolio.
Our approach includes:
- Designing personalised investment structures for growth, income or capital protection
- Incorporating structured products into diversified strategies across asset classes
- Providing ongoing performance tracking, risk monitoring and liquidity planning
Case Examples / Hypothetical Scenarios
Let’s explore two hypothetical cases that demonstrate how structured products might work in practice:
Scenario 1: Auto-Callable Note on Equity Index
A three-year product with annual observation dates. If the index exceeds a preset level on any observation date, the note is called early with a fixed return (e.g. 8% p.a.). If not called, the investor receives full principal back at maturity with a buffer against a 20% market decline.
Scenario 2: Yield-Boost Hybrid Note
A two-year structured note combining a fixed-income bond with a derivative linked to FX performance. Offers a potential annualised yield of 6% with risk limited to FX volatility within a set corridor.
These products aim to align payout structures with specific market views and investor preferences.
Choosing the Right Structured Product
Selecting the right structured product for you means taking a close look at several factors:
- Underlying asset: Equity, FX, interest rates or commodities
- Term to maturity: Short-term vs long-term strategies
- Payoff structure: Capped returns, buffers, principal protection levels
- Investment objective: Growth, income, risk mitigation
An approach unique to you and your needs, which is guided by expert advice, is essential to ensure the structure fits within your overall financial goals.
Structured Products as Strategic Wealth Tools
Structured products offer unique benefits for investors seeking tailored risk-return outcomes, capital protection, and access to alternative return sources. At MHG Wealth, we combine global product access with bespoke advice and DIFC-regulated services to help our clients make the most of these innovative tools.
The key takeaways are:
- Benefits of structured products include capital protection, risk diversification and access to alternative asset classes for enhanced income.
- Investors must be aware of risks such as credit, liquidity and complexity, and should consult experienced advisors for suitability.
- In Dubai, structured products are regulated under the DIFC framework, ensuring transparency, compliance and investor protection.
If you’re interested in how structured products can fit into your investment strategy, contact our wealth management team or explore our solutions in alternative investments to learn more.
