In a past life, I sold companies. I worked as a (low-level) investment banker. One of the companies I helped hawk ran a chain of casual dining restaurants. Its locations were mostly in rural and suburban parts of the country, and the dining was very casual. As part of our "due diligence" the team sampled fare from the menu. Their best-selling item was "S'mores Pie." It wasn't always so popular.
The CFO's favorite dessert was French Silk. That's an elegant slice of airy chocolate mousse inside a chocolate pie crust and topped with Chantilly and a flourish of chocolate curls. The restaurant put it on the menu. It bombed. The restaurant brain trust got together — and knowing their audience — changed the name to "S'mores Pie." Overnight it rocketed up to their bestseller.
The recipe stayed the same. The menu pictures stayed the same. The fancy chocolate curls stayed the same. All that changed was the name.
S'more risk
Large financial institutions like pensions and insurers constantly look to get rid of long-term volatility from their portfolio. They have fixed retirement obligations or annuities to pay for in the distant future. They want certainty. They want protection. They want to buy long-term volatility puts.
An insurance risk officer goes to their neighborhood risk market — like Goldman or Marex — and says, "we'd like to get rid of this volatility, what is the price on some long-term volatility puts, please?"
The broker calls up a bunch of investors, funds, high net worth individuals, the usual suspects. She asks, "want to sell long-term volatility protection?"
That's a wild ask. It's the "long-term." Loads of crazy stuff happens in the "long-term." No takers. She calls her guy back "No one wants to sell that. There's no price. It's 'long-term' anything can happen."
The insurance risk officer responds with a text of dollar signs and "can you help me now?"
The broker pivots, "let me see what I can do."
She goes into the lab to cook up something. A little while later her army of salespeople are on the phone talking about “Structured Notes” to those high-net-worth clients who scoffed at selling volatility puts.
"Structured Notes" cover a variety of financial recipes. One of them is you buy a note. Then you get, say, 7% per year for the term of the note, maybe five years, unless the S&P drops by 30%, then you only get 70 cents back for each dollar you invested. In most cases, you get your money back plus a nice return. In really bad cases, you lose a lot. You've taken a higher return in exchange for taking on the risk in the really bad long-term scenarios. That's, um, exactly the same as selling long-term volatility puts.
Lamplighter's talked about bundling before. Here, the banks are packaging something nice - great long-term rates, with something no one wants to sell - long-term volatility puts. The end product is an attractive one for a lot of people, I guess.
Marex Hedging and Investment solutions is its kitchen that cooks these things up. That business grew 91% in the first half of this year. It’s the company's best performing segment and a big reason for its 43% overall growth rate. It's not the main part of their business, but it is a profitable one. And growing.
Marex isn't the only one to do this. Structured Notes have been a great business for banks and shops like Marex who pass along the risk to someone else. It has been a surprisingly successful line of business. The surprise helped MRX shares rise 80% so far this year.
Check, please
For pies and financial products, marketing matters. When you find the right product for the right group of customers, a business can cook. Whether its pie or long-term volatility puts, creative reframing can serve investors satisfying returns.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.