9 Structured Funds

9.1 Structured funds

A structured fund combines securities and/or derivatives to create a specified risk-return profile, capital-preservation objective, participation formula, yield or cost structure. Capital preservation normally applies only at maturity and is subject to fund/issuer/strategy performance; it is not the same as deposit insurance or a guaranteed NAV. Funds are governed by the applicable Code on Collective Investment Schemes, offering documents and licensing/custody requirements.

Key fund governance points are a licensed manager, fiduciary trustee/custodian, NAV calculation/reporting, valuation and pricing policies, disclosure of fees/risks, audit and investor dealing terms. Conflicts may arise where the manager, issuer, swap counterparty, custodian or distributor is affiliated.

Core fund vocabulary

Know the glossary terms: asset allocation, AUM, closed/open-ended fund, CIS, CPPI, cushion, custodian, drawdown, excess return, index fund, ISIN, management fee, minimum subscription, multiplier, NAV, option, share class, Sharpe ratio, SICAV, TER, total return, total return swap (TRS), tracker, trailer/upfront sales charge, UCITS, umbrella fund, underlying, VaR, volatility and zero-coupon bond.

Traditional, tracker and structured funds

Traditional active funds seek to select assets; trackers seek to replicate an index; structured funds use formulae/derivatives to transform the distribution. Evaluate the underlying, maturity, payout, market outlook, fees, liquidity, counterparty and tax—not only the fund label.

Total return swap (TRS) and option structures

A TRS fund receives the total return of a reference asset/index and pays financing to a swap counterparty. It provides efficient exposure but adds counterparty, collateral, reset, liquidity and termination risk. A “zero-plus” structure typically combines a fixed-income/zero-coupon component with a call, offering a floor-like maturity outcome and upside participation subject to costs and issuer/fund risk.

CPPI

Constant proportion portfolio insurance allocates between risky and risk-free assets:

$$\text{cushion} = \text{portfolio value} - \text{floor value}$$ $$\text{multiplier} = \frac{1}{\text{crash size}}$$ $$\text{risky allocation} = \text{multiplier} \times \text{cushion}$$ $$\text{risk-free allocation} = \text{portfolio value} - \text{risky allocation}$$

As the portfolio rises, risky allocation normally rises; as it falls, the manager sells risky assets and moves into the risk-free asset. The floor may increase over time and the risky allocation may be capped at 100% or allowed to be leveraged depending on the terms. A sharp fall can force the fund entirely into the risk-free asset, after which it may miss a later recovery: this is the “cash-lock” or gap-to-floor risk. In a range-bound market CPPI may buy high and sell low. DPPI varies the multiplier and has similar path, fee, gap, liquidity and manager risks.

Other structured-fund arrangements

Common forms are capital-preservation funds, formula funds, capitalised/distribution classes and direct/indirect swap-based structures. Commodity-linked funds must consider futures roll yield: backwardation can help roll return; contango can hurt it. Option-based funds must explain the premium, strike, cap, barrier and issuer/counterparty.

Roles, controls and after-sales

The manager implements the mandate; trustee/custodian safeguards assets and oversight; administrators calculate NAV; auditors review; distributors provide information/suitability. Controls include operational, financial, legal, independent trustee, valuation, liquidity and conflict controls. Documents include prospectus, PHS and trust deed. Investor service includes dealing/NAV, factsheets, monthly reports, tax and corporate-action information.

Investors may be retail, accredited or institutional. Core-satellite allocation, rebalancing, liquidity management and cash investment are common uses. Assess tracking error, leverage, derivative counterparty, concentration and redemption gates.

9.2 Structured ETFs

An ETF is typically an open-ended listed fund that trades intraday and uses authorised participants to create/redeem units. Types include equity, fixed-income, cash, currency, commodity, index, alternative, leveraged, inverse and protective ETFs.

• Physical/direct replication: holds all or a representative sample of securities.
• Synthetic replication: uses swaps/derivatives; a 10% net counterparty-exposure concept applies subject to the rules and documentation — collateral is the key control.

Pricing risks include bid–ask spread, NAV discount/premium, tracking error, TER, roll yield, cash drag, FX, market liquidity and counterparty collateral. Creation/redemption arbitrage helps keep price near NAV but can fail in stressed markets. ETFs provide intraday liquidity, diversification, transparency, short/leveraged/inverse exposure and core-satellite tools, but are not risk-free. Compare ETFs with ETNs (unsecured debt), mutual funds (usually NAV dealing) and listed derivatives.

Investors should understand index methodology, rebalancing, distributions, securities lending, swap/collateral, leverage reset and closure/merger risk. After-sales monitoring includes NAV, tracking difference, corporate actions and factsheets.

9.3 Summary

Structured funds are CIS vehicles whose payoff depends on assets, formulae and sometimes derivatives or swaps. CPPI preserves a floor only subject to path and issuer/fund risks. ETFs trade intraday but have NAV, tracking, market, liquidity, FX and counterparty exposures. Governance, custody, disclosure and suitability are part of the product.

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