Regatta to launch US structured product ‘portfolio’

Ex-lawyer turned financial adviser, author and advocate for the industry, Regatta’s Eric Greschner talks to Yakob Peterseil about the inroads structured products have made in the US, the work he is doing and what remains to be done to boost the investments' appeal beyond their current niche

Eric Greschner, Regatta Research and Money Management

Eric Greschner's "eureka moment" came in the autumn of 2008. That year, the Houston-based portfolio manager watched as the stock market crash wiped out his and everyone else's portfolios, and along with them a cherished belief. Like many investors, Greschner saw diversification as the best defence against a stock market collapse, but a plummeting market that took down everything with it forced him to re-evaluate. "The only two things that went up were volatility and correlation," he recalls.

Five years later, the co-founder of Regatta Research and Money Management is preparing to launch what he says will be the first structured product portfolio in the US when it opens to investors later this year. Developed along with his friend and colleague Tim Mortimer of Future Value Consultants (FVC), the portfolio follows a strategy that aims to deliver both alpha and beta by exploiting those same phenomena, which Greschner calls the "hidden qualities", in a portfolio of structured products. It is one way he is hoping to pull back the curtain on structured products and catch the eyes of US investors.

The other way is through his books. Greschner's first book, Win in any market, is due this year and promises to help investors transform "mild- to moderate-returning markets into solid bull markets" while letting them "keep what they already have". Also in the works is what Greschner says will be a three-volume work intended to introduce structured products to financial advisers, the first volume of which will run to 300 pages and has been "years in the making".

The main focus, however, is on Indexed Alpha, Greschner's portfolio. Once it is up and running, the portfolio will carry a $100,000 minimum investment and a 1% annual management fee. A timing strategy determines the optimal time to buy equity-linked structured products, while a proprietary algorithm takes advantage of qualities like volatility, correlation and skew. Greschner says he will migrate his existing clients to the new platform while soliciting new ones. "Before, we'd spike our own bespoke notes and use the tranche offerings, but this will offer them significantly more attractive opportunities," he says.

At Regatta, which has offices in Texas and Louisiana and has been feted by Forbes Magazine and Bloomberg, Greschner and his colleagues have long used structured products to "more precisely" sculpt risk-return profiles for their clients. The wealth management firm has invested in capital-protected, outperformance and income notes from banks such as Barclays, HSBC and JP Morgan over the years, spreading around the mix of issuers to diversify its credit risk. Greschner remains committed to raising the relatively subdued profile the industry enjoys in the US, where he says it has made titanic strides in the areas of education and transparency, but can still do more.

"I hear criticism that we are moving too slowly, but any time you have an issue over pricing and disclosure, it's going to spark an intellectual debate," he says, alluding to the drawn-out and sometimes fractious process by which the US Securities and Exchange Commission (SEC) introduced estimated value disclosure in the US last year. Greschner likens it to the UK's rollout of the Retail Distribution Review (RDR) in 2013. That brought an end to commissions for financial advisers and moved them all to a fee-based model (the model, incidentally, employed by Regatta). Many advisers initially resisted the change. "RDR was a long time coming," he says, "but look at how quickly those changes have been implemented."

The next inflection points for the industry in the US, he hopes, will come from new wrappers and the introduction of a standardised nomenclature for structured products, a move Greschner is intimately involved in seeing through.

"Soon, we'll see structured products in unit investment trusts and exchange-traded funds (ETFs), which will increase liquidity, further diversify credit risk, and let us bundle or unbundle the fixed-income and option components. The ETF has been in the works for about a year now, and the goal once it's launched is to provide the benefits of structured products while minimising some of the potential downsides."

Greschner was asked by a US trade body to sit on a committee that will work to promote the adoption of a uniform nomenclature. The model is the Derivative Map dreamt up by the European Structured Investment Products Association, which has inspired similar classification systems in Germany, Italy and Switzerland. The US should be next, argues Greschner.

The system will no doubt feature in the next project Greschner is preparing, teaming up once again with FVC to offer a monthly tip sheet as a service to US investors and advisers. The newsletter will list and rank the monthly tranche offerings from the major investment banks. Like his other projects, it is aimed at closing what he calls the "knowledge gap" that separates investment banks from the public. Until that gap shrinks, structured products will remain niche investments, he believes. "Better education for consumers is coming," says Greschner, "and we're hoping to make our contribution to it."