Credit Suisse links to interest rate strategy index; risky notes could attract savvy investors, adviser says

By Kenneth Lim

Boston, Jan. 27 - Credit Suisse plans to links a series of accelerated return notes to the relatively new Credit Suisse Fortinbras USD Excess Return Three Factor Model index.

The notes could appeal to investors who believe that the index's strategy will work in the next few years, an investment adviser said.

Credit Suisse, through its Nassau branch, plans to price zero-coupon Accelerated Return Equity Securities due Feb. 28, 2012 linked to the Credit Suisse Fortinbras USD Excess Return Three Factor Model index.

At maturity, the notes will return par plus double any gain in the underlying index. Investors will lose 1% for every 1% decline in the index.

The underlying index, which was launched on June 27, 2008, seeks to measure changes in the term structure of interest rates, in particular, the level, slope and curvature of the yield curve, in a globally diversified manner using a momentum-based algorithm.

Risky structure

The structure offers potentially high returns but at significant risk, the adviser said.

"The upside is double the index return, and it's not capped, but on the downside you have full participation in any decline in the index and you can lose all your principal," the adviser said. "The fact that there's no downside protection at all will be a hurdle for any risk-averse investor."

The underlying index also has a complex strategy that many retail investors may not understand, the adviser said.

"I doubt many small retail investors will find this suitable," the adviser said.

"It looks like a very complicated model, and generally we don't advise people to invest in things they don't understand.

"And honestly, after the subprime mess and the Madoff stuff, who's going to be the next sucker who puts their money in something they don't understand?"

Attractive leverage

But the notes could be attractive for investors who understand the underlying model and believe that the index will work in the next three years, the adviser said.

"Theoretically, compared to a direct investment in the index, this is clearly better because you have a leveraged return on the upside and only a one-for-one participation on the downside," the adviser said.

"Of course, you probably can't get a direct investment in the index anyway, so that may not be a useful comparison. But in that case then the note provides you with access to this particular strategy."

That access could be valuable for investors who want to use the strategy, the adviser said.

"If you understand this strategy and you think it's a good strategy, a product like this could make sense because it's a very convenient way of replicating the returns of the strategy without having to manually create and maintain the positions," the adviser said. "If I think momentum investing in rates makes sense, I can just buy an investment in an index that does it rather than do it myself.

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