Hybrid Securities – Equity Downside for Fixed Interest Returns
We often hold a material amount of cash in our funds management operation and, with deposit rates at painfully low levels, we have been considering ways we might work the cash a bit harder. Like many investors, we have focused attention on hybrid securities as one possibility.
Having studied this possibility for a short time we are now focusing elsewhere. Analysis of the terms of some of the recent offerings reveals highly complex instruments with concealed downside risks and an interest rate that falls well short of compensating investors for the hidden downside. A cynical observer might think that some of these products are designed to exploit retail investors who are unable to fully assess the downside risks they are taking on.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
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Adrian Brooks
:
I have looked into hybrids over quite a period of time and have always agreed with the heading (equity downside for fixed income returns). The only time I have ever purchased hybrids was in 2009 (I purchased IAGPA and SEVPC, now SVWPA) when some were trading at significant discounts. This then provided some of the potential upside that was needed to justify investing on a risk/reward basis. Note I dont hold either of these securities anymore.