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Spotlight on Structured Products
06.07.2009

structured productsThe financial crisis has certainly put the spotlight on structured products. The collapse of Lehman Brothers and the subsequent news about retail investors losing their retirement money invested in Lehman structured products have certainly painted a negative picture of the derivatives-based investment vehicle.

With this kind of publicity, one would have thought that structured products are out of favor. But this was not the case in 2008 when sales to retail investors in UK increased 25% to 9.68 billion pounds from 7.17 billion pounds in 2007, based on a report by Structured Products magazine.

The report, citing Blue Sky Asset Management as a source, said client demand and higher level of product issuance drove sales up in 2008. Structured product issuance amounted to 985, about 20% higher than 2007.

The extraordinarily high volatility in equities combined with the low interest environment in 2008 had led investors to look for investment options that provide better profits. The popularity of structured products, however, has been increasing over the past two to three years where expansion in terms of market reach was noted. Some observed that this has become much more of a mass retail type of market and one that is being integrated into the core parts of investors’ portfolios. A Euromoney round table discussion on structured products in 2008 had a Citi executive saying that private investors are no longer viewing structured products as an alternative asset class but are using structured products to overlay entire portfolios as the core part of the asset allocation.

So what makes structured products an attractive proposition? Obviously it provides better opportunities for your money. It also allows you to access markets and assets beyond the traditional stocks and bonds. Structured products are tailored investments with returns linked to the performance of an underlying benchmark such as interest rates, equity markets, foreign exchange markets or corporate credits. It uses derivatives strategies to benefit from all types of market situation. It benefits from rising rates and prices, and also allows you to optimize returns even during declining markets. Unlike equities, structured products provide a defined outcome, the pay-out profile is clear and it allows you to structure your risk and return characteristics.

Overall, it is an attractive addition to your portfolio usually offering a high interest coupon. As with any investments, structured products carry risk which varies depending on the type of products you choose. Before investing, it is usually beneficial to consult with your advisor to see if a structured product is right for you.


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