The Deutsche Börse press release said of the Short Dax index: “This makes Deutsche Börse the first index provider in Europe to develop an effective short strategy in the form of an index.” If it was indeed the first, it was only a matter of minutes until Dow Jones released its own version of the strategy.

Copy cat tactics are common in the index world. Although it still seems remarkable that both would introduce the same strategy on the same day. Perhaps it’s not that amazing though. FTSE, for one, told me in December that they can produce an index within 3 days of concept creation.

Then again maybe its just a coincidence borne out of demand for short selling strategies and a sign that many are getting nervous about a down turn in equity markets in 2007. Structured products linked to short selling strategies certainly look an ideal way for investors to diversify against a fall in equity markets. So in spite of the launches stealing one another’s thunder, it seems assured that licenses will be sought on both new indexes.

Such releases may all be in vain for the index providers – for structured products revenue at any rate. Sorry to be vague but keep an eye out for Structured Products magazine’s March cover story to find out why.

DANIEL SHEEHAN

"Structured products that purport to offer equity-like returns without equity market risk are of no use to long-term investors, two authoritative studies have concluded," the article begins.

The studies, by Barclays Capital and ABN Amro/London Business School, fly in the face of what the banks are doing with their structured products businesses. Both have upped investment in their franchises in recent years, and both have brought to market some innovative solutions, for both the retail and high net worth markets. Just click on our awards section to see just how creative the banks have been, and remember that we don't give awards for shoddy products that are of "no use" to investors.

I have to say I'm surprised the story (available here) made it to the front page of FT Fund Management (FTFM). After all, we've heard these arguments before.

What's more nowhere in the article is the phrase 'portfolio diversification' mentioned - and we all know that such a strategy, simple though it may be, is what continues to drive growth in the structured products markets. Growth is also coming from institutional investors (as well as the ultra high net worth segment) who are presumably well aware of the various benefits and disadvantages of investing in the markets.

While ABN Amro and Barclays Capital continue to market their structured products offerings, and tell us that they are also useless investments, I'm glad to say there are no Chinese walls preventing me from referring to the services of Structured Products magazine.

So I'd strongly encourage you to read this article, by Jim Goddard-Jones, now a director at UK distributor NDF, espousing the benefits of structured products.

In the article (which was published in April 2006, so long before these studies came out) Jim notes how some investors may view structured products with suspicion. He also notes how such investments provide all important portfolio diversification - a phrase that probably should have made it to the cover of FTFM.

According to the recently published Greenwich Associates/SPA US Market Survey, issuance in the US market for 2006 was $64 billion in 2006, compared with $193.6 billion for Europe. 53% of US structured products were equity linked, 22% were tied to fixed income and 26% were based on alternative underlyings. Sample findings of the survey can be found here.

Another interesting finding was that issuance in the UK and Italy contracted in 2006, compared to 2005. That tallies with the findings of The European Retail Structured Investment Products Market, an executive report published by Risk Books, Incisive Media’s book publishing division. In this report we found that UK issuance was down around 11% for 2006 compared to 2005.

Remember, however, that this report was researched in mid 2006. Now, it transpires, various market estimates suggest that the UK market ‘bounced back’ in late 2006, with around a 15% growth for the whole year. Next month Structured Products magazine will report on how the UK market is being revitalised…

Another interesting point of the Greenwich/SPA survey is that “continued growth depends on additional marketing and education – of both advisors marketing structured products and clients themselves – on the key benefits of using structured products as part of an investment portfolio.”

This doesn’t just apply to the US market – all markets should take note…

Merrill has since further built out its replication offering with the launch of a further index, this time the Merrill Equity Volatility Arbitrage Index, and seems to have stolen an initial break on the competition in this emerging product line.

Barclays Capital has also begun testing on a hedge fund replication strategy, The FT reports. Given the recent buzz in financial markets about replication it’s hardly surprising that the UK bank may be looking to join its American rivals with a replication offering. It does mark, however, a slight change in line from what Barclays has previously told the press.

In the January article we reported comments from its head of Global Investor Solutions, Giles Rothwell, that it was not seeking a solution at the moment.

The only clue Barclays offered at the time was this: "Replication strategies are interesting as a concept and they are feasible because of the liquidity and cost saving they bring to the market," Rothwell said.

Maybe Barclays knew more about its hedge fund replication plans than they let on back in January? Will another bank look to replicate replication, and will the strategies find favour with high net worth investors like some wealth managers have predicted?

Daniel Sheehan, Staff Writer, Structured Products

The Economist has a point though - namely that the growth in the OTC weather derivatives market can largely be attributed to hedge funds trading the contracts. Although the weather risk market began life as a way for energy companies to hedge their weather risk it seems that hedge funds are now the dominant players. In that sense the market has failed in it original objective (to provide a way for corporates to hedge the impact of weather). The Chicago Mercantile Exchange has been listing weather contracts successfully for a number of years and hedge funds increasingly like to 'play' the market.

Structured Products has also written about how weather contracts are finding their way into investor portfolios. In March 2005, for example, I wrote how Dexia was considering launching a weather related structured product for the Belgian market (nothing came of the idea, but click here for the story). Famously Bristol & West did succeed in bringing a weather product to the retail market (click here for the story). Having said that the snow option part of the product didn't pay out and the product was really just a simple income and growth plan.

Last year a number of banks, including ABN Amro (also mentioned in The Economist article) brought emissions-based certificates to market. Presumably it's just as easy to do something weather related?

As hedge funds continue to invest in the weather market it's only a matter of time until we see structured products providers offering retail investors weather-linked investments. Or has the cold in London got to me? Let me know your thoughts...

CPDOs received a lot of attention in the press at the end of last year, partly because they let investors take credit exposure via credit derivatives at up to 15 times leverage. "The ones who had the idea say it was a bright idea, and the ones who did not have it are trying to destroy the project," said one structured credit player at the same Christmas party. Now, it seems, other banks are getting on on the act, following ABN Amro's successful CPDO offering, dubbed Surf.

SG CIB is one such bank. It hopes its first CPDO, Stelaris, will launch by month end. But as more and more CPDOs hit the institutional market, the question structurers are no doubt asking is whether the products will also sell at the high-net-worth level, or even the retail level.

In the February issue of Structured Products magazine we profile Signina Capital - a Swiss wealth manager. The firm says it is already exploring offering its HNW clients CPDOs and other wealth managers have told me they are also considering getting in on the act.

The questions remain though: are these investments suitable for the individual? Will other banks also start to market CPDO offerings?

And finally, was the man in the know at the Christmas party just jealous, or did he have a point? Email me your comments...

At a conference in London yesterday, organised by Arete, some of the UK's most respected distributors, including NDF's Jim Goddard-Jones and Barclays' Colin Dickie, told delegates that there is "an air of optimisim in the UK right now." According to various estimates the UK market was up around 20% last year over 2005 figures, making it one of the fastest growing markets in otherwise mature European markets.

Apparently more novel product offerings, linked to a wider range of underlyings, are being brought to market and 2007 could see a return of the income product. The distributors did, however, freely admit that the simple FTSE linked product is still the king of the UK market.

Will this ever change? Is you firm bringing to market some sexy offerings previously unseen in the UK? Or will the UK remain the old man of Europe with boring offering, after boring offering?

Let me know your thoughts...

Regulators from Italy, the Netherlands, the UK and the European Commission discueed the impact of regulation on the structured products market at the conference organised by Arete Events. Post panel questions were probing, and I have to admit, a little on the complicated side. Regulators, however, are used to the complex (they usually inflict it on everyone else), but, by and large, were unable to answer the questions. One regulator even suggested that the questions should be posted on websites so that the regulators had a chance to respond. I'm not sure whether the suggestion was tongue in cheek.

The questions concerned the impact of the Markets in Financial Instruments Directive (MiFID). The only question I have is if the regulators can't respond, how on earth can they expect the market to come to grips with the directive?

At the end of last year the SEC said it was considering making hedge funds available only to those with upwards of $2.5 million in financial investments (up from the current minimum of $1 million) in net worth (including home value). So called mom and pop investors have taken umbrage.

They have a point. It would be nice, however, if investors were as vocal about retail access to structured products. Over the past few years regulators, such as the US National Association of Securities Dealers, have explored derivatives-based investments in the US and, on occasion, have suggested that structured products should only be made available to those with access to options accounts. Again such rules effectively suggest that those with less than a few million in net worth somehow lack brain cells to understand financial products. What role should the regulator/government play? Should investors have the right to invest their hard earned cash as they deem fit, providing they pay the relevant taxes? Is a mortgage any easier to understand than, say, a capital protected five year structured product linked to the rise in an equity index?

Here are some quotes from my favourite response. Stephen R. Adams says on the site that he is “disappointed in the proposed increases." Essentially “the fundamental premise of the...rules is that because I am not yet rich, I must be too stupid to understand these investments and too stupid to seek professional advice,” he adds. “Therefore I must be protected against myself by a rule that serves to give those with the advantage of wealth the additional advantage of broader opportunities for increasing their wealth.”

Adams' full response can be accessed here.

A directory of all the comments can be seen here.

Unlike Structured Products awards, the PA awards are voted for by UK IFAs. It seems that the Keydata folk must be doing something right. But it also suggests, to me at least, that everyone else must be doing something terribly wrong.

We've covered the UK market in detail recently, following news that issuance was down in 2006 and the news that UK products were, for want of a better word, boring. Click here to read 'The UK market feels the strain.'

Is Keydata really the only provider to have provided interesting products during the past few years? Let me know your thoughts...

"No customer would ever knowingly agree to pay a NIS 700 commission for investing NIS 20,000. No customer would ever knowingly agree to pay a 3.5% commission on the investment. No customer would ever knowingly agree to pay a 90% commission on an option he purchases, and therefore Bank Hapoalim makes sure that its customers pay all these unknowingly," the claim states.

It will be interesting to see how the law suit plays out – not just for the developing market in Israel but also for potential repercussions in other countries.

We wrote about a Hapoalim subsidiary, Poalim Asset Management, in June 2006. The story can be accessed here. The-London based firm distributes structured products to its high-net-worth clients through Bank Hapoalim. The asset manager regularly holds 'beauty contests' to find the right partner to structure the investments. Poalim Asset Management works with a list of key investment banks such as Barclays Capital, Nomura, BNP Paribas and Calyon.