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Structured products: Keeping it simple

Investment banks are rushing to offer systematic payoffs and smart underlyings as structured notes, partly in response to investors’ growing mistrust of more complex products. But is replicating hedge fund strategies in note form as simple as they are trying to make out?

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STRUCTURED NOTE SELLERS have good reason to reconsider the types of payoffs they offer investors. The credit crisis has lifted the lid on the can of worms that was the structured credit business. It has also had the knock-on effect of making investors wary of anything bearing the tag "structured", including complex equity-linked notes, which are far removed from the world of securitization.

Investors have also noted the underperformance of some of the more difficult to understand products, such as those that gave access to equity market correlation. Dealers say investors are signalling that they no longer want to sit through a lecture where every second word is "rho", "gamma" or "vega", but would rather hear an interesting but simple investment story that they can understand.

This has raised demand for less quantitative-driven and more transparent payoffs, say dealers, and has partly led to a shift away from highly complex products. Instead, banks are pushing a new generation of payoffs, some of which try to present, in note format, the type of alternative strategy usually only associated with hedge fund investing.

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