Structured products on hedge funds grow

Averaging out excellence

MOST BANKS ARE eager to hitch their wagons to the hedge fund gravy train. Many are building up prime brokerage services and some are considering following in JPMorgan's footsteps by buying hedge fund businesses. Another avenue for banks to profit from investors' continuing interest is to offer structured products based on funds of hedge funds and, more recently, hedge fund indices.

Traditionally, such products have been popular with high-net-worth individual investors but banks are increasingly looking to institutional investors. The high-net-worth market requires a third-party distributor, so the banks give up some of their margins. Selling to institutions cuts out the middleman.

Other banks are one large group of potential customers. But pension funds might be harder to win over. And consultants are suspicious that banks are trying to charge for protection on structured products that investors should not need.

Quick fix

Investment in structured...