Structured Notes Losses | Why Risk Management Matters for Investors

• March 11, 2025
• Structured Products

With the advancement of technology, structured notes have become more accessible and very popular among a wide variety of investors, especially those seeking alternative investment opportunities. Despite its popularity and availability, investors still need to be wary of the risks and potential losses associated with structured notes.

If you have suffered losses due to structured notes, do not hesitate to reach out to us. At Wolper Law Firm, we have dedicated and experienced investment loss attorneys who can help investors seeking recovery from structured notes losses and more.

What Are Structured Notes?

Structured notes are hybrid debt securities that financial institutions issue to investors. They combine payoffs from several securities typically made from a bond (roughly 80%) and a derivative (roughly 20%). The bond acts as protection for investors whereas the derivative provides upside potential. Structured notes can also be a catch-all term to refer to principal-protected notes, reverse convertible notes, leveraged notes, etc.

Structured notes investors typically have some amount of flexibility in the sense that structured notes can provide limited losses with limited gains; however, they also provide low levels of liquidity and can be difficult to trade in the secondary market. To illustrate it better, imagine a five-year bond linked to an options or futures contract on a certain commodity. Linking a bond to an options contract can significantly change the risk tolerance of an investor, allowing them to invest in an asset class that would otherwise be beyond their acceptable risk thresholds.

When compared to traditional investments, structured notes are best suited for investors who want investment solutions tailored specifically to their liking. The catch is that structured notes are often far more complex, carry more risk, and have different payout mechanisms.

Types of Structured Notes

Here are a few of the most common types of structured notes, how they work, and how they differ in terms of risks, returns, and investment objectives.

• Absolute Note
  • How it works – Absolute notes allow investors to participate in the upside of the underlying asset with some downside protection.
  • Risks – Protection limits the downside and can diminish high returns.
  • Returns – Returns will ultimately depend on the performance of the underlying asset. Potential caps may throttle the maximum potential of returns.
  • Objectives – Absolute notes are suitable for investors who want exposure to growth while having a safety net against losses.
• Digital Note
  • How it works – Digital notes give investors a single predefined coupon payment once specific conditions get met at maturity, often less than one year.
  • Risks – Investors can only recover the principal if they obtain principal protection or they incur losses if conditions aren’t met.
  • Returns – A fixed binary payout with no incremental gains.
  • Objectives – Digital notes are ideal for investors looking for short-term investments with clear payout structures.
• Growth Note
  • How it works – Growth notes give investors exposure to price appreciation of an underlying asset.
  • Risks – There is a high risk of loss if an underlying asset underperforms or declines.
  • Returns – Unlimited upside based on asset performance with potential caps on some returns.
  • Objectives – Growth notes are best suited for investors with a high risk tolerance who are seeking to take advantage of long-term asset growth.
• Income Note
  • How it works – Income notes are similar in function to bonds in the sense they offer periodic coupon payments over a fixed term. Income is typically derived from the performance of the underlying asset.
  • Risks – Poor underlying performance can hamper payouts. Downside risk depends on the issuer’s creditworthiness and the terms of the note.
  • Returns – Regular income through coupons with lower growth potential compared to absolute notes.
  • Objectives – Income notes are designed for investors who prioritize regular cash flow.

Are Structured Notes Suitable For All Investors?

Structured notes are great for investors seeking to curate their investing experience down to the wire. While structured notes have become more accessible to investors, this doesn’t necessarily mean that they’re suitable for all investors. Generally speaking, most investors who purchase structured notes are often those who have clear and specific financial goals in mind with a high tolerance for potential risks.

It’s important to understand that structured notes losses can be immense, especially to the novice investor. Investors out of their depth can quickly find themselves needing assistance to get out of bad structured notes or other investing losses.

Common Risks in Structured Notes Investments

Structured notes losses can quickly spiral out of control for many investors. That’s why it’s essential to recognize the red flags surrounding them. Here are a few common structured notes risks to look out for:

• Market risk: While market risk is prevalent in virtually all investments, structured notes are often volatile. Not all structured notes are adequately protected, which means if the underlying asset doesn’t perform well, investors can incur significant losses.
• Liquidity risk: Due to limited secondary market trading, structured notes have low liquidity and can be very difficult to sell before they reach maturity.
• Interest rate fluctuations: The value of structured notes with fixed income rates will go down as interest rates rise.
• Fee and commission structures: High fees and commissions can often reduce returns. However, many investors often overlook the fee and commission structure of their structured notes, leading to avoidable losses.
• Tax complexity: Tax rules surrounding structured notes can be complex due to the hybrid nature of structured notes. In other words, a failure to adhere to the regulations may result in tax liabilities and issues.

Risk Management Strategies For Structured Notes Investors

Risk management strategies can help mitigate potential structured notes losses for investors. The best plan to reduce risk involves due diligence, portfolio diversification, and taking into account legal considerations.

Due Diligence

Taking the time to understand complex terms, assessing sustainable levels of risk tolerance, and evaluating potential brokers will significantly reduce the risk of structured notes losses. At the end of the day, averting the vast majority of investment risk comes down to hitting the books and dedicating time to learning the ins and outs of any financial service or product. So before taking on the challenge of investing in a structured note, do research first.

Diversification

As you may be aware, it is not a good idea to put all eggs in one basket. Making an entire investment portfolio comprised solely of structured notes isn’t optimal. Structured notes run the risk of being very volatile and can result in serious losses. Balancing structured notes with other traditional investments is an efficient risk mitigation strategy.

Legal Considerations

There are legal protections in place to help investors tackle structured notes losses. For instance, brokers and financial institutions are required to make relevant disclosures that enable investors to identify any predatory practices. An investment fraud attorney understands these and can help you mitigate investment risks.

When To Seek Legal Recourse

Structured notes are great for investors willing to take the time and dedication needed to make them an optimal investment. While the potential gains and pros may seem to outweigh the cons, the truth is that structured notes losses should never be underestimated. Ignoring the potential risks involved with structured notes should be at the top of an investor’s mind prior to dedicating any funds to them.

Unfortunately, structured notes can be presented as a “get rich quick” solution for many investors. The potential for investment fraud is high for structured products and broker negligence can lead to many investors getting shafted with losses.

If you suspect that the risks of structured notes were misrepresented to you or you have incurred unexpected losses on your investment, you should get in touch with an attorney as soon as possible. There are legal options you can take to help recover investment losses and prevent further damage.

Structured Notes Losses: FAQs

How Do Structured Notes Differ From Bonds or Stocks?

Structured notes are hybrid debt securities that combine a bond and a derivative, such as an underlying asset like stocks or indices. Returns are based on the performance of the underlying asset. Bonds give fixed income over a period of time based on interest and stocks give returns based on price changes and dividends.

Are Structured Notes Liquid?

In general, structured notes aren’t very liquid. Secondary markets for structured notes are very limited and they’re designed to be held until maturity.

Can I Exit a Structured Note Before Maturity?

Possibly, but this is very challenging. The secondary market for structured notes that haven’t reached maturity is small and selling before maturity will often mean steep price discounts.

What Is The Average Loss Potential In Structured Notes?

It’s hard to put a concrete estimate as most structured notes are heavily tailored to each investor’s specific goals. If a structured note has principal protection, losses may be limited. However, the lack of said protection can result in a total loss if the underlying asset doesn’t perform well.

How Are Structured Notes Taxed?

Tax treatments often vary, but generally speaking, structured notes are taxed based on their components. The bond portion typically gets taxed the normal income tax rates whereas the derivative component gets taxed at capital gains rates.

Speak To an Experienced Investment Fraud Lawyer To Discuss Structured Notes Losses

The investment world is rife with malicious actors seeking to defraud well-meaning investors. If you invested in a structured note and have sustained losses, it’s essential that you get professional legal advice to recover your investments. Wolper Law Firm has experienced and dedicated structured notes loss lawyers ready to help. Contact us today for a free consultation.