After the Bull Market: What Next?

Aug 17, 2023|Decoding Risks in Structured Products- 3 min

after the bull market 1600x500

The investing landscape has changed fundamentally over the past 18 months. The global economy remains strong, but a new era of high interest rates and a shrinking money supply might end the bull market that has persisted largely since 2009.[1] Good returns may be harder to achieve through simple, passive investing strategies. Investors must seek other ways for growth.

This series explores two strategies: structured products and private market investments. Both strategies aim to enhance returns using different methods. This article explores the fundamental difference between these two methods.

What is “active” investing?

The alternative to passive investing is active investing, which comes in many types, but requires additional effort or insight to enhance returns.

The traditional approach

The traditional form of active investing is to identify a promising yet neglected and/ or underperforming asset and invest in it.

For example, an investment fund that is considering buying a stake in the development of a beachfront resort or financing it partially with debt needs specialized knowledge of issues such as regulation (zoning laws, environmental protection), the local tourism market, construction and operational knowledge to support and improve the project after completion. Most importantly, the fund must identify the opportunity in a timely manner, which requires connections and history in the field.

The investment itself (e.g. a beachfront property) may not be difficult to understand, but the process of identifying such investments and fixing problems that arise is complex and requires expertise. Traditional active investing therefore carries risk and should only be undertaken by or with an experienced investment team.

Financial engineering

Another way to actively enhance returns is through “financial engineering,” designing a new product using mathematical models and/ or incorporating multiple financial instruments.

A classic example of financial engineering is the synthetic collateralized debt obligation (Synthetic CDO). Instead of lending directly to a single company through a traditional bond, the investor may own a share in a pool of derivative products (credit default swaps) linked to multiple bonds issued by many organizations.

The pool may also be divided into tranches that define the order by which defaults in the underlying debt is absorbed, where the senior tranches would only incur a loss after the more junior tranches are written off completely. Investors may earn higher returns by buying the riskier tranches that would be the first to take the loss from defaults in the underlying debt portfolio.

When invented, Synthetic CDOs were considered an ingenious way to benefit from a diversified pool of collateralized debt without lending directly and select the tranche that suits their risk appetite.

Unlike the beachfront resort, however, the human brain cannot process the mechanics of such a product intuitively without complex mathematical models. The subprime mortgage crisis showed that even experts can lose track of the assets to which they are exposed by overreliance on mathematical models.


Active investing is complex by definition. If it was easy, it would be commonplace and could never outperform the market.

The process of traditional active investments is complex (due diligence, maintenance, exit), while financially engineered products themselves are complex. Even experts may struggle to handle the intricacies.

The next article looks at the pros and cons of structured products in more detail.

[1] U.S. Bank

About The Family Office

Since 2004, The Family Office has been the wealth manager of choice for more than 200 ultra-high-net worth families and individuals, helping them preserve and growth their wealth through customized solutions in diversified alternatives and more. Schedule a call with our financial experts and learn more about our wealth management process.

Keep reading

Who we are

About us Investment Philosophy Board Members Leadership Team Our Locations
Contact Us

Manama Office:

9th Floor, Al Zamil Tower 305 Government Avenue Manama, Bahrain

bahrain flag+973 1757 8000

Dubai Office:

Central Park Towers DIFC Level 21, Office 21-43 Dubai, United Arab Emirates

uae flag+9714 8343863

Riyadh Office:

Suite 102, Signature Center Prince Turki bin Abdulaziz Al Awwal Road, Hittin Riyadh 13512-2110, Saudi Arabia

ksa flag+966 11 250 7720


Ready to start your investment journey?

Click here to begin

The Family Office Co. B.S.C (c) is licensed as a category 1 Investment Firm by the Central Bank of Bahrain C.R.No.53871 dated 21/6/2004. Paid Up Capital: US$ 10,000,000. P.O. Box 18024, Manama, Bahrain.

FAQsCorporate Governance GuidelinesPrivacy PolicySitemap