Structured investment vehicle
What is a structured investment vehicle?
A structured investment vehicle (SIV) was a type of fund that proved popular until the financial crisis of 2008. Funds borrowed short-term securities at a low interest rate and invested in long-term securities at a much higher rate. New financial regulations introduced after the crisis caused SIVs to cease operating.
Where have you heard about a structured investment vehicle?
You probably won’t have heard of the term ‘structured investment vehicle’ in the media, but you’ll have heard about the product that most vehicles invested in – mortgage backed securities (MBS). The exposure that these vehicles had to MBS is often seen as a major cause of the 2008 crisis.
What you need to know about a structured investment vehicle.
As a private investor you likely won’t have invested in a structured investment vehicle, but you can still learn a lesson from their demise. Along with many other market participants, the fund managers did not appreciate the credit risks associated with holding MBS. Assuming that short-term commercial paper carried a similar risk profile to long-term MBS was catastrophic and led to the Dodd Frank Act of 2010 and the extensive stress tests that banks are now subject to. You should consider stress testing your own portfolio to better understand your market and credit risks.