Volume falls 35% in pre-holiday market amid exit from equities, search for alpha

By Emma Trincal

New York, Dec. 14 - Last week was slow for U.S. structured products issuance as retail investors driven by risk aversion exited equities and some institutional players focused on alternative investments, according to sources and data compiled by Prospect News.

The upcoming holidays were the culprit as well, sources said.

In the week ended Friday, agents sold $238 million, down 35% from $365 million priced the week before.

The decline came for the most part from an almost 50% drop in the number of deals, which fell to 77 from 140, rather than the shrinking of their size. The same number of larger deals priced in both weeks: seven over $10 million and none in excess of $50 million.

For the month to date, volume dropped 20% to $401 million from $499 million in November.

"My volume has been relatively slow for the past two months, I would say; it's been fairly flat," a structurer said.

Sources said that the upcoming holidays as always did not help sales.

"Retail is pulling out," the structurer said. "People are looking to buy presents, not structured products, at this time of the year."

Exit from equities

Equities as an underlying asset class declined by almost 50% to $134 million from $257 million the week before, accounting for only 56% of the total last week and 70.5% of the volume recorded during the prior week.

For the month to date, sales fell by 35%. Equities make up 62% of December's volume while their share of the total amounted to 76% last month.

A New York sellsider said that the market is "very choppy" and that headlines from Europe contributed to the ups and downs, as shown on Friday when the S&P 500 index surged amid a European summit.

"There's just no direction. Clients have no idea where the market is heading. That's the reason why volume is down," this sellsider said.

"People are still buying one-year products. I think it's crazy because we're heading for a full-blown crisis soon. A two- or three-year horizon makes a lot more sense.

"European banks that usually don't fire anybody have been laying off a lot of people in structured products. We've seen that in some U.S. banks too. First they start with structurers, then the salespeople and finally the traders."

Delta one

The leading structure last week was simple trackers, also called delta one products.

"Delta one are those products where the variation of the price of the certificate is the same as the variation of the price of the index. There's no optionality," the structurer explained.

Such deals accounted for more than a third of last week's volume at 36% of the total, according to data compiled by Prospect News.

The two top deals of the week fell into the trackers category. They give investors exposure to commodity strategies via the use of algorithm indexes.

Deutsche Bank AG, London Branch priced $28.68 million of 0% market contribution securities due Jan. 10, 2013 linked to the Deutsche Bank Liquid Commodity Apex 14 Index Total Return. It was the top offering in size.

This index seeks to achieve a target volatility of 14% in the Deutsche Bank Liquid Commodity Apex index. The Apex index itself is intended to reflect the performance of a basket of three underlying indexes weighted according to a dynamic allocation strategy that aims to achieve an equal "risk contribution" for each underlying index.

The second offering was brought to market by Barclays Bank plc. The firm priced $27.72 million of 0% notes due Jan. 10, 2013 linked to a basket holding equal weights of the Barclays Capital Commodity Based Alpha Trading Strategy VOLT 5% Total Return index and the Barclays Capital Commodity Strategy 1599 Total Return index. The combined underlying strategies are aimed at allocating most efficiently the various futures contract rolls along the curve in order to maximize returns.

Seeking alpha

"These kinds of deals are implemented by institutional investors. They are too complex to be popular among retail investors," the structurer said.

"It's probably a big pension fund or a big insurance company behind it. It falls into the category of alternative investments."

The exit from equities seen among small investors and the appetite for alternative investments on the part of bigger players followed the same logic, this structurer said.

"What people are seeing is that traditional asset classes, stocks and bonds, are not driving the same returns anymore," he said.

"I don't know if these institutional investors are very much aware of what they're buying. ... I guess they must have analyzed those complex indexes. ... But what they're really looking for is alpha. They're shifting away from equities in search of absolute returns," this structurer said.

"Investors also realize that U.S. stocks have been doing pretty well. Among some institutional investors, the feeling is that maybe the U.S. may not decouple forever from the European crisis."

Commodities was the asset class that benefited the most from the algorithm indexes deals, according to Prospect News data.

Commodity-linked notes increased in volume by 32% to $71 million in six deals. The top two offerings made up 80% of that total.

Deutsche Bank also priced a smaller deal, an $8.32 million offering of 0% market contribution securities due Jan. 10, 2013 linked to the Deutsche Bank Liquid Commodity Index - Mean Reversion Plus Total Return.

The underlying index is another algorithm that systematically adjusts the weights of the underlying futures commodities contracts based on their trading prices.

Commodities were also on the rise month to date. At $110 million, the volume in December is nearly eight times more than the $14 million recorded during the same time last month. As a share of the total for the month, this asset class grew to 27.5% from 3% last month.

Investors showed less appetite for leverage, another sign of risk aversion, especially as pure leveraged structures without any buffer or barrier were the ones to fall the most. Those dropped to $9 million this month from $127 million last month. Their market share declined to just a little over 2% from more than a quarter of total volume.

"People are pulling away from risk; there's less leverage. I've seen these trends before. In fact, I've since it since the end of the summer," the sellsider said.

"I don't know anyone in any structured products desk that's happy right now."

For the month, equity indexes have suffered the most, receding to 43% of the total this month from 61% in the first third of November and down in volume by 43% at $174 million.

In comparison, stocks fared better, falling only 6% to $71 million. Stock deals also rose slightly in market share to 18% of the volume from 15%.

Morgan Stanley priced the largest stock deal and the No. 3 offering of the week with its $25.49 million of contingent income autocallable securities due Dec. 12, 2012 linked to Transocean Ltd. shares.

The notes offer a contingent coupon of 4.35% observable quarterly and a 65% barrier on the downside.

Goldman Sachs topped the league table last week with seven deals totaling $67 million, or 28% of the total. It was followed by Deutsche Bank as No. 2 and by Barclays as No. 3.

"People are looking to buy presents, not structured products, at this time of the year." - A structurer

"I don't know anyone in any structured products desk that's happy right now." - A sellsider

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