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Capital Markets

Structured products: Concerned clients demand a rethink

Structured products are proving neither as safe nor as lucrative as investors were led to expect. However, discomfited clients are prompting those banks that have survived to devise products better suited to difficult conditions. Peter Koh reports.

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STRUCTURED PRODUCT INVESTORS, typically wealthy individuals or institutional fund managers that follow sophisticated strategies, should ordinarily be expected to sleep peacefully in times of uncertain market conditions, comforted by the soothing partial or total principal protection they have bought. But the extraordinary conditions of the financial crisis have disturbed even those who thought they were insulated from such things, with nightmarish plunges in the mark-to-market value of their investments.

Collapsing stock prices have brought about the worst-case outcomes envisaged by some investors, while for others, the collapse of confidence in the creditworthiness of some of the terribly convincing banks that sold such things has redefined what ‘worst expectations’ really means.

The poor performance of structured products is, however, hardly unique in the present market and the investment banks that invented them still believe in their merits and are busy devising new ones, better suited to present conditions, even if the products originally turned out to be money losers for the banks themselves. Private banks, meanwhile, are stepping up to save their clients from the arrival of unexpected hits to their investments.

There are two basic types of structured products: those in which the principal invested is at risk and those in which the principal invested is protected.

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