Luma Financial Technologies, a Cincinnati-based alternative investment platform, and SpiderRock Advisors, a Chicago-based provider of options strategies in the wealth market, have formed a new partnership aimed at providing advisors direct access to structured note replication strategies via separately managed accounts.
That process entails mirroring what financial institutions do when creating structured notes. They are debt securities that typically combine fixed income, call and put components to adjust the overall risk/return profile of the investment. In “replicating” that, SpiderRock arranges the calls and puts and facilitates fixed-income investments.
The goal of the partnership from Luma’s perspective is to provide advisors using its platform more options in the alternative investment space. It allows them to compare and contrast traditional structured notes with the daily liquid replications SpiderRock produces.
“We can provide advisors a choice between listed and non-listed derivatives and structured notes so they can find the investment that makes the most sense for their clients,” said Tim Bonacci, CEO and founder of Luma, in an interview with WealthManagement.com. “In the current environment it’s difficult to create alpha. It requires investors to use something different. Many times—if not most times—this can be accomplished with a derivative-based product. The SpiderRock team has created effective products.”
Issuance of structured retail products has almost doubled in recent years from $58 billion in volume in 2019 to a peak of $100 billion in 2021 and $93.7 billion in 2022, according to Morningstar data.
“The entire listed derivative and structured notes market is growing and there are good reasons for it,” said Eric Metz, president and CIO of SpiderRock. “First and foremost, it is risk management. Use of structured notes and listed derivatives is at the forefront for many advisors asking How do I position my client’s portfolio on the go forward and simultaneously there could be return needs or a need for volatility management.”
The companies saw the development of the partnership as a natural outgrowth of interest in structured products and derivatives.
“From the SpiderRock side, our clients were regular adopters of both of our firms,” Metz said. “We didn’t really know the team at Luma until about three years ago. We proactively reached out based on client requests. We saw, ‘We do X, you do Y.’ There are some synergies here.”
But there are some in the industry that are not fully sold on the utility of structured products.
“In terms of the market as whole, these investments are most often sold and not bought,” said Madeline Hume, a NEXT senior research analyst for Morningstar Research Services who authored a research note assessing the risks and opportunities of structured products leveraging data from Luma in April. “The vehicle is pretty adaptable. It can be deployed in portfolios in ways that make sense. But, unfortunately, given the commission-based framework, they can take on that ‘au courant’ flavor. The vehicle does not do right by investors the way a more strategic overlay of risk management could.”
The investments may also come off as being overly complex for advisors or retail investors. That’s something both Luma and SpiderRock are attempting to address through education and implementation.
“The education is upfront. But it is more than that,” Bonacci said. Traditional structured notes can be hard to price and trade. Technology can facilitate this. That’s what we are trying to accomplish. It’s to provide ongoing information and analysis so advisors know how it is performing as clients’ needs change over time. If you can take away some of that difficulty, you can see some amplified production.”
“The notion of democratization of what have been perceived as complicated products is core to our everyday work,” added Metz. “It is demystifying and using clear language and demonstrating the value proposition in ways that are digestible. The uptick in adoption of the products in recent years is evidence that this is happening. And I think this partnership is harnessing that dynamic.”
For now, the partnership will target independent broker/dealers and RIAs and ideally expand from there.
Luma Financial Technologies was founded in 2018 and is a fintech aimed at helping advisors research, purchase and manage alternative investments and annuities. It’s platform includes educational resources and training materials as well as giving advisors the ability to create and price custom structured products. Luma’s data has been available to Morningstar Advisor Workstation subscribers for a little over a year.
SpiderRock Advisors, founded in 2015, focuses on providing customized option overlay strategies to investors. BlackRock took a minority stake in the firm in 2021. As of March 2023, SpiderRock manages more than $3 billion for RIAs, family offices, national broker/dealers and institutional clients.