“Equity-linked notes are a type of structured product issued by brokerage firms and traded in the secondary markets like shares of common stock,” the report notes. “Once sold only to sophisticated investors, structured products are increasingly being sold to unsophisticated retail investors. Equity-linked notes are difficult to evaluate and monitor, have high hidden costs and are illiquid. They are therefore virtually never suitable for unsophisticated investors.”

Using three examples of actual products sold by major brokerage firms to retail investors, Dr. Craig McCann and Dr. Dengpan Luo of SLCG go on to demonstrate that “investors who buy these notes at the initial offering dramatically overpaid for the investments.”

It all sounds rather exciting. In fact, the report sounds groundbreaking and structured products professionals everywhere should be quaking in their boots.

Fear not though since the basic premise of the report is inherently flawed. SLCG takes an entirely US centric view, ignoring the fact that European and Asian investors have been buying equity linked notes for a good few years. If the report had been titled ‘Are Structured Products Suitable for US Retail Investors’ I would have been less quick to judge. But the report doesn’t state it is only examining the US experience.

Ignoring this oversight by SLCG, is it fair to suggest that structured products are not fit for US retail investors? For one I don’t think so: this may have been the view of US retail investors a few years ago but things have changed dramatically in the interim. Also someone in the country must be buying them, and, by association understanding them, if market figures are to be believed.

The New York-based Structured Products Association (SPA) is preparing its final assessment of the business year and predicts that the US structured products market will be worth around $70 billion by the end of 2006, up from $48.7 billion at the end of 2005.

To my knowledge there have been no SEC registered complaints from US retail investors saying they are baffled by the intricacies of equity-linked notes. And there has certainly never been a retail structured products mis-selling scandal in the land of opportunity. Importantly, SLGC only examines equity-linked products, although the title of the report would suggest it seeks to analyse the risks and benefits of all forms of structured products.

What’s more, the report, while pertaining to be an academic study (written by PhDs and filled with graphs), makes the unforgivable mistake of quoting a largely one-sided source. Amazingly the very first citation of the report refers to a Wall Street Journal article which appeared early this month (click here for full story). The article was widely lambasted by structured products professionals worldwide for providing a one sided, and questionable, view.

I could pick more holes in the report but am aware that the readers of this site are more than capable of making their own conclusions. To read the SLGC report click here.