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Innovation is the transformative driving force that propels businesses forward. The importance of innovation lies in its capacity to solve complex problems and enhance efficiency.
In the financial sector, new technologies provide unprecedented opportunities and challenges. Artificial intelligence, blockchain, and data analytics are not buzzwords but transformative tools that can redefine how financial operations are conducted. Asset managers must leverage these technologies to enhance the decision-making processes, optimize risk management, and ultimately deliver greater value to investors. The rise of robo-advisors, algorithmic trading, and digital investment platforms signals a shift in investor preferences. To remain competitive, asset managers and service providers need to tailor their services to meet these evolving expectations.
Gone are the days of one-size-fits-all investment models. Instead, investors turn to specialised strategies catering to specific preferences, risk tolerances, and long-term objectives. The integration of digitalization solutions plays a pivotal role in facilitating such tailored investments, offering cost-effective means to implement and manage specialized portfolios.
Historically, implementing specialized investment strategies incurred high costs, limiting accessibility to a select few. However, digital solutions have lowered that cost and have created clear opportunities for active investment strategies.
Actively Managed Certificates (AMCs) have emerged as a transformative solution to address these issues.
Actively Managed Certificates (AMCs) are structured products with dynamically adjusted underlying strategies or components, managed at the discretion of a strategy manager or according to a predefined index rule. These certificates offer a swift, adaptable, and cost-effective method for investors to access dynamic investment strategies. Issued as debt securities, AMCs can link to both traditional securities and non-bankable assets like real estate, loan portfolios, collectables, and digital assets.
Actively Managed Certificates (AMCs) can go by various names such as Dynamic Equity Notes, Strategy Notes, Actively Managed Trackers, Exchange Traded Notes (ETN), or Exchange Traded Products (ETP). This flexibility in nomenclature underscores the versatile nature of these certificates.
Actively Managed Certificates (AMCs) come in different types, evolving from passive derivatives to more dynamic structures. Three main classifications include on-balance sheet AMCs, off-balance sheet AMCs, and tokenized AMCs.
On-Balance Sheet Actively Managed Certificates (AMCs): Issued by banks or securities dealers, typically with traditional capital market instruments as underlying assets. Investors may be exposed to the credit risk of the issuer.
Off-Balance Sheet Actively Managed Certificates (AMCs): Issued by Special Purpose Vehicles (SPVs), these AMCs can be linked to alternative investments such as private equity, digital assets, or collectables. SPVs are structured to mitigate investor exposure to the issuer's credit risk.
Tokenized Actively Managed Certificates (AMCs): Leveraging Distributed Ledger Technology (DLT), these AMCs use blockchain for transferability. This format is particularly popular for AMCs involving digital asset-based investment strategies.
The issuance process for Actively Managed Certificates (AMCs) is streamlined and involves presenting the investment idea, negotiating terms, onboarding the investment manager, and creating legal documentation.
The lifecycle includes investment, offer, legal documentation, and structuring. Once documentation is in place, Actively Managed Certificates (AMCs) can be issued rapidly.
Asset managers are increasingly drawn to Actively Managed Certificates (AMCs) due to their simplicity, flexibility, and customization, making them a favoured choice for active investment management.
With AMCs, converting an investment strategy into a transferable security is swift and efficient. Actively Managed Certificates (AMCs) are versatile, accommodating various investment strategies and underlying assets, including equities, bonds, digital assets, and non-bankable assets like collectables.
While Actively Managed Certificates (AMCs) and funds have similarities as financial products, they differ in terms of structure, transparency, costs, regulation, and trading. In contrast to traditional funds, AMCs provide a faster, more flexible, and cost-effective way to access dynamic investment strategies. Setting up a mutual fund involves a complex process, demanding substantial pre-launch assets, an extended setup time, and significant expenses for legal, auditing, and accounting services. In contrast, AMCs enable investors to convert their investment strategy into a transferable security within a few days. Notably, many AMCs start operating with assets under management (AuM), totalling less than USD 10 million.
Actively Managed Certificates (AMCs): AMCs are categorized as debt securities, often falling under the classification of Structured Products. They can function as exchange-traded products (ETPs) and trade on stock exchanges, similar to exchange-traded funds (ETFs).
Funds: Funds, encompassing mutual funds or hedge funds, constitute pooled investments with diverse structures, including open-end or closed-end funds.
Actively Managed Certificates (AMCs): AMCs typically provide a daily disclosure of their holdings, offering investors a high level of transparency. This allows for visibility into the underlying assets and their performance.
Funds: Mutual funds are obliged to periodically disclose their holdings, commonly on a quarterly basis.
Actively Managed Certificates (AMCs): AMCs generally boast lower expense ratios when compared to actively managed mutual funds.
Funds: Actively managed funds often incur higher expense ratios due to additional costs, which are not automated and are outsourced to third parties, along with the extended time required for regulatory approval.
Actively Managed Certificates (AMCs): AMCs are regulated as Structured Products in most jurisdictions. When listed on exchanges, they must adhere to the regulations of those specific stock exchanges.
Funds: Mutual funds fall under the regulatory oversight of securities regulators, such as FINMA (Finanzmarktaufsichtsbehörde) or BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht).
Actively Managed Certificates (AMCs): AMCs can be traded Over the Counter (OTC) or on stock exchanges throughout the trading day, allowing investors to buy or sell shares at market prices. This flexibility is akin to trading stocks and bonds.
Funds: Mutual funds typically undergo a single daily net asset value (NAV) calculation, and transactions occur at the end of the trading day at the NAV price.
Actively Managed Certificates (AMCs) play a crucial role in investment portfolios, offering agility in adapting to market opportunities. Through ongoing analysis, strategic adjustments, and asset reallocation based on market trends, AMCs capitalize promptly on favourable conditions, potentially outperforming passive counterparts.
The Actively Managed Certificates (AMCs) market is growing fast, thanks to key factors that appeal to issuers, asset managers and investors. These include easy setup, low costs, flexibility, increased transparency, time efficiency, and adaptability to market trends.
The market's expansion is further driven by the involvement of White Label Solutions and innovative fintech companies, contributing to its overall dynamism.
Actively Managed Certificates (AMCs) are expanding into new markets, including Africa, the Middle East, and Latin America.
Key trends include the growing popularity of fixed income in AMCs, driven by appealing bond yields, and the development of exchange-listed AMCs, creating a more liquid secondary market. Anticipated demand for thematic AMCs reflects investors' interest in focused exposure to areas with potential growth.
The broader adoption of Actively Managed Certificates (AMCs) encounters three main challenges: information and education, the legal and regulatory landscape, and software tools to manage AMCs at scale.
Many potential issuers and investors face obstacles due to a lack of knowledge about Actively Managed Certificates (AMCs). To overcome this, the market needs more comprehensive educational initiatives and awareness campaigns. Clear and accessible information will bridge the knowledge gap, promoting confidence among stakeholders.
Adhering to diverse regulations in different jurisdictions can be complex and may impede the widespread adoption of Actively Managed Certificates (AMCs). The solution lies in collaborating with regulatory bodies, aiming to simplify and clarify regulatory processes. This collaborative approach ensures that regulatory frameworks in various countries align with the unique features and benefits of Actively Managed Certificates (AMCs).
Startups are developing specialized software tools designed to meet the unique requirements of the Actively Managed Certificates (AMCs) market. Fostering a supportive environment for startup growth and encouraging the creation of purpose-built tools enables the industry to overcome this technological barrier.
Actively Managed Certificates (AMCs) stand out as one of the most significant financial innovations in recent decades. Their distinctive features make them a compelling choice for issuers, investment managers and investors.
As with every rapidly evolving market, staying informed about the latest product information and regulatory updates is crucial. Issuers seeking technical solutions can explore partnerships with startups specialized in creating dedicated software.
As new markets and asset classes emerge, Actively Managed Certificates are well positioned to become the primary method for quickly capitalizing on these opportunities.
This article was first published by SRP on 15 March 2024 https://www.structuredretailproducts.com/news/details/79789
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