Democratizing Derivatives: Halo Investing on Fintech and Social Impact
This piece was written by Kavya Chandran, a participant on Business Today’s Chicago Breakout Trip, Crossroads of Humans and Machines. Kavya is a member of Princeton’s class of 2021 and is currently studying Electrical Engineering.
Investing in financial markets has become more and more popular over the years thanks to brokerage accounts with no minimum balance, mobile trading apps, and online resources that teach people without financial backgrounds how to invest. However, there are still certain segments of the financial market that individual investors cannot participate in due to high minimums or lack of transparent pricing, among other concerns.
Halo Investing, one of the companies that Business Today visited on the Chicago Breakout trip, is looking to help investors overcome these barriers and further diversify their portfolio by investing in a type of asset called a structured note. There are two parts to every structured note: a bond and a derivative. Because a bond provides a level of protection and fixed income, investors have the ability to use that money to limit the downside risk associated with the derivative.
Why is investing in structured notes desirable? If an investor bought $100,000 of Apple stock and the price went down 70% after a few months, the investor would have lost $70,000 and could potentially lose more money in the future if the prices continue to fall. Whereas if the investor bought a structured note where the derivative’s return was based on the return of Apple stock, a bond with a return of 10% will cap the downside of Apple to 90% of the original investment. As you can see, these notes can be structured in ways that will allow the investor to make returns in up, down, or flat markets. It is a great middle-ground between stocks, which are higher return, and bonds which are lower return.
Even though I have followed the stock market for a long time and taken finance classes, it took me several hours to understand exactly how structured notes work. Like Halo Investing’s CEO Biju Kulathakal explained, the average investor doesn’t want to spend that much time figuring out how complicated financial instruments work or tracking their performance. They just want to invest in assets that will help them meet their savings goals for buying a house or retiring. Before that conversation, I thought of investing as simply a way to gain additional income. I didn’t realize that investors would actually have specific targets such as making 5% or 7% returns in a year.
This insight explains why Halo Investing has chosen to spend a lot of time and money building out a user interface that makes it easy for investors to compare prices, expected returns, and asset performance over time. It helps break down a complex financial topic into easy-to-understand smaller components and allows individuals to see which structured notes best match their financial goals.
Kulathakal also discussed how being a disruptor in any sector is not easy, but there will always be some early adopters who are willing to take a chance on your company. This is not his first venture; he helped found Redbox as well as Trading Block. Although it may seem like those companies are not related, there are some commonalities. They all found ways to optimize processes in the status quo, and this context illustrated how even non-linear career paths can lead to the development of skills that will be useful in future jobs.
Finally, it was inspiring to see that even though Halo Investing operates in the global finance realm, they found a way to create social impact by equalizing investment opportunities for people from different economic backgrounds. The team was dedicated to their mantra of positive impact before profits, and it served as a reminder that no matter industry you go into, you should look for a company whose mission really resonates with you.