Brinker Capital has thrown its hat into the "no downside" ring with its own offering, a series of principal protected notes that are fixed income vehicles with market participation through an equity index. In the course of developing this product, the company considered many different options, said Eddie Cohen, the managing director who headed up the project.

With other structures, he said, "Many of the drawbacks included cost or upside participation being limited."

The first issue of notes will probably have a participation rate between 75% and 85%. As a fixed income vehicle, the fees associated with the product range between 75 and 90 basis points, as opposed to the 115 to 145 basis point range for equity products. The first offering, which has not yet opened, will close sometime in June, and subsequent notes will be offered periodically, probably every 30 to 60 days, Cohen said.

Brinker is using a straightforward investment strategy that uses zero-coupon bonds to guarantee principal and uses the rest of the money to buy index options.

Cohen said that Brinker decided to offer principal protection because of demand from advisers over the past year or so. However, some skeptics have commented that the interest in principal protection may fade with the rebound of equities.

"We view the index-linked notes as having two potential applications. First, to limit downside risk in a portfolio," Cohen said. He advocated the use of principal protection vehicles for only a portion of an equity portfolio so that, once the market turns, investors will be able to more fully participate in the market. However, the principally protected portion helps mitigate the risk of investing in equities.

In a ploy that may add longevity to the principal protection concept, Cohen also pointed out that it is a fixed income security. "Some people may view this as a substitute for an existing fixed-income manager," he explained, especially if they are invested in fixed income because they are trying to manage investment risk, as opposed to reaping income from fixed income investments.

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