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Abstract

A unitary investment instrument combining a swap and a structured note, both of which provide multiple utilization of capital. The unitary instrument has three performance components. An investor invests in the issuer the principal amount of the structured note component. The structured note provides its own portfolio exposures as well as serving as collateral for the base benchmark portfolio swap (alternatively, the base benchmark portfolio exposure can be acquired through a separate collateral deposit on the investor's own portfolio). The first component is a benchmark portfolio, which in one preferred embodiment is a financial or stock index such as the S&P 500 Stock Index. The second component is an incremental benchmark portfolio keyed to the same benchmark index and the third component is keyed to a passive commodity index, having long and short positions, which in one preferred embodiment is the Mount Lucas Management Commodity Index. The instrument's passive commodity index exposure is established as the product of a leverage factor and the amount of the benchmark portfolio exposure; thereafter this exposure may be the product of (1) a leverage factor and/or (2) the change in value of the overall investment, the benchmark component and/or the commodity index component. The basic return to the investor comprises the change in value of the benchmark, the incremental benchmark and the passive commodity index exposure over a predetermined period of time. The structured note component of the investment instrument includes a guarantee of the return of the investment principal; the swap does not do so, but rather reflects the full risk of the benchmark portfolio exposure. However, research indicates that the unitary swap/structured note instrument has an unusually high probability of outperforming the benchmark index across a wide range of market cycles.

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