Lehman offers bull-bear notes linked to currencies; absolute return structures could do well, advisor says

By Kenneth Lim

Boston, June 5 - Lehman Brothers Holdings Inc.'s new bull-bear notes linked to a basket of currencies reflects the market's interest in absolute return strategies, an investment advisor said.

"There's a lot of uncertainty in the markets these days, and when investors aren't sure about where things are heading, these products tend to do better," the advisor said.

Lehman ties to currencies

Lehman plans to price the zero-coupon principal protected CRIC bull-bear notes due June 30, 2011 linked to a basket of four currencies.

The basket comprises equal weights of the Canadian dollar, the Russian ruble, the Indian rupee and the Chinese renminbi, all relative to the U.S. dollar. The basket level increases if the currencies appreciate against the greenback.

At maturity, if the basket finishes above its initial level, each note will pay par of $1,000 plus at least 100% of the basket return. If the basket finishes below its initial level, the payout will be par plus at least 80% of the absolute percentage of the decline.

Notes address uncertainty

The notes could be attractive to investors who are unsure about the direction of the currencies in the basket, the investment advisor said.

"The investor gets a positive return regardless of whether the currencies are up or down against the U.S. dollar," the advisor said. "The only situation where you get back only your principal is if the basket hasn't moved at maturity.

"To get this kind of structure you give up something in the participation rate. It's only one to one on the upside, 80% on the downside. Obviously if you were confident that these currencies are going to do better or worse, you'd want a product that lets you do more than just track, or actually if it's down, underperform the underlying.

"If you think the currencies could go either way, then maybe you'd want to take something like this," the advisor added. "In fact, you're probably more bearish on the currencies but you think there's a slight chance they could appreciate against the U.S. dollar."

The notes also offer access to an asset class that some investors may be reluctant to invest in directly, the advisor said.

"I guess another reason to buy a product like this would be to get exposure to an asset class," the advisor continued. "If you want to take a position on some of these currencies, for whatever reason, but you don't want to actually have to buy those currencies, then you could get something like this."

Absolute return notes in favor

The advisor said products like Lehman's that offer positive returns regardless of bullish or bearish conditions could be more popular in today's markets.

"I think if you ask around, most of the people will tell you they don't really know what's going to happen in the next few months to the rest of the year," the advisor said. "I'm sure there are some people who are comfortable speculating, but my sense is that most of it is just that. Mostly speculation. In times like these, I think a lot of people want some form of insurance in their investments."

The advisor said certain structures will do better under those conditions.

"Principal-protected products are definitely more attractive," the advisor said. "There are also products like these bull-bear notes, which pay you something regardless of whether the underlying is up or down. I think outperformance notes, you know, you get something if one index does better than another, even if they're both down, I think those could be more interesting. Range notes, where you get something back as long as the underlying trades within a range."

The current market offers issuers an opportunity to push out new products, the advisor said.

"I don't know what you're hearing from issuers," the advisors said. "But I think that when the market is a little shaky, that's when you have opportunities to innovate. Let's see something besides reverse convertibles."

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