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Jason Barsema, Halo Investing

Halo brings structured notes to the masses

Someone who welcomes a little volatility in the equity markets is Jason Barsema (pictured), President at Halo Investing, a multi-issuer technology platform aimed at giving access to structured notes to wealth managers and independent financial advisers.

Barsema says that Halo correctly forecasted the top of volatility in the US by doing a mailing supporting structured products just as the VIX hit 50 on Monday 5th February and then halved on the day.

Barsema’s background is in structured notes, and his co-founder, Biju Kulathakal, is the technologist. First widely available as a product in 2003 in the US, but much earlier in Europe, structured notes offer exposure to an underlying investment but with limited risk on the downside.

The firm’s advances in technology have brought the cost of structured notes down, and made the whole process of buying them easier for financial advisers around the world.
“Halo is America’s first multi-issuer technology platform for structured notes,” Barsema says. The platform is host to 10 issuers, drawn from North American and European banks, and originally served the independent RIA (or IFA) and the Broker/Dealer market in the US, which is one of the world’s most fragmented.

The firm is now working with big banks and their private banking teams to automate their issuance and distribution of structured notes. The firm holds no assets and classes itself as a FinTech company - ‘the Amazon of structured notes’.

The structured notes are primarily linked to equities in some way, either to an index or to an ETF or a specific equity. The firm currently offers exposure to 742 underlying assets, which also includes various commodities, interest rates and currencies.

“The primary reason for buying structured notes is that they give you downside investment protection, so in a world with a lot of volatility in the equities market, you can get a substantial level of protection for the underlying asset,” Barsema explains.

All structured notes have a maturity date which can range from three months to 20 years, linked to the performance of the underlying stock, index or ETF, and they pay either a fixed return or a percentage of the upside participation of the underlying asset.

The firm has relatively recently moved over the pond to offer their platform in Europe, and here they are finding that European banks prefer to white label the Halo software platform to enable them to offer structured notes.

With the shift to fee-based financial advice worldwide, Barsema increasingly sees advisors using structured notes without an embedded commission which keeps fees down.
And in terms of performance, the more protection the structured note offers, the less it pays out. Barsema gives a very simple example of a five year note linked to the S&P 500 offering 150 per cent of the upside of the S&P, with a cap or maximum return on it of 72 per cent at maturity.

On the downside, the protection amount is 25 per cent hard protection, so if the S&P at maturity is down between zero and 25, the investor doesn’t lose any of his or her original cash. If it’s down 26, then it is down one point of the original pot.

“Prior to Halo it cost a fortune to put this together,” Barsema says. “It was like how cars were assembled before Henry Ford brought in his assembly line in the early 1900s – products were very costly to produce and very costly for the consumer.

“Halo’s technology gives an innovative and efficient means for the IFA to buy the note, but we also offer a much more efficient process that reduces the cost of structuring. This means the issuer can charge less because their margins and volumes are better, so customers can get better terms as these savings are passed on.”

Halo ‘democratises’ the product, Barsema says. “It’s a social mandate for people who need protection the most.

“We work with all ages on the spectrum around the world, and while the millennials can be the most risk averse investors, many people who are most benefited by structured notes are going into retirement.”

Structured notes can help with people who are going into retirement at the worst time, as yields are low and stocks are high, he says. The accessibility of structured notes was not the only problem in the past, but they were also expensive, not transparent and illiquid with the issuer risk lying with the bank who issued them.

“Our technology helps solves those problems, and Halo is a combination of being a product expert on high net worth and institutional portfolios and a technologist. We said this is a great product in theory, but bad in practice.”

“Structured notes are going to gain in popularity, as they should, because we are facing one of the most challenging investment environments ever. All investors need these products to solve the conundrum of too much global liquidity, zero interest rates and an all time high in equities.”

Halo has also implemented a unique, competitive auction process within structured notes. Prior to Halo, buyers chose participation rates from individual banks, which can be quite close to each other, and within an environment that isn’t really competitive.

“We take all of our issuers and make them physically compete in an auction which can drive up the participation rate 20 – 50 per cent. The banks like it because we are bringing them more flow and orders than they have ever seen before, and in order to get that, they have to be more competitive. We also help the banks become more efficient so they can do this.”
As an example, Barsema quotes a financial adviser buying a product linked to a couple of different underlyings. The participation rate on offer was averaging at 210 per cent but after the auction process it had improved to 305 per cent, almost a 50 per cent improvement in terms.

That trade was for USD2.5 million, but Halo can do trades from USD100,000 upwards and advisers can break that up into USD1,000 minimums within customer accounts.
Barsema concludes: “We have seen extraordinary adoption of our products because over 50 per cent of our customers had never heard of a structured note before Halo. It’s time that all investors have efficient access to this product.”

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