The notes, which BNP Paribas has been offering to clients in Europe for two years, will be marketed to local discretionary funds, insurance companies and corporate treasury funds as an alternative to cash.
Investors get a guarantee on 100% of principal while enjoying the upside offered by an absolute return fund. The notes have varying maturities from between three and 10 years.
The product puts a new spin on traditional structured notes, explains Patrick Tuohy, managing director of Momentum Asia. Instead of using zero-coupon bonds to provide the guarantee, BNP allocates about 60% to 70% of note proceeds to Momentum which filters the money into one of three funds of hedge funds.
"Then as our performance moves in line with their model, which is over and above the return needed to ensure the guarantee, they inject more money into our funds to increase the returns," he says. In the reverse scenario, if Momentum's funds underperform, BNP increases the cash proportion of the note.
Total return on the notes, net of fees, is between 8% and 10%. "Returns have been slightly better than this, but we don't want to overstate the performance otherwise we get put into a 'to good to be true' category," says Tuohy.
He says investors benefit from two levels of risk management. "Momentum has its own fund of funds constructional risk model, and then BNP overlays its risk management safety nets by monitoring what we do on a weekly basis. Ultimately they provide the guarantee for the note."
In Europe, Momentum invests funds in 25 such structure notes.
"It's a sign of the times that BNP Paribas is ready to structure products around funds of hedge funds in Asia," says Tuohy, hinting at an increased interest in alternative capital management strategies around the world. "In the past they've structured notes around things like indices and currencies, but now they are shifting to funds of funds. While it is not going to be as exciting as getting a leveraged-return on an index, by investing in fund of funds they are reducing the degree of uncertainty for investors."Executives from Momentum and BNP Paribas plan to brief potential clients on the product in Singapore in mid October.