Editor's letter

Investors in structured products have been buying some or other version of volatility from the minute they signed up; whether they have understood this is a different issue

Not to be outdone by the May effect, this August has revived the notion that when bankers in Europe take their holidays the financial markets are vulnerable to a rapid shakedown. In recent years, market volatility in May had been the greatest fear, but events last month put these early summer jitters into perspective.

But if you are involved in structured products why should you care? Your offering is generally capital protected and your options are usually built on an averaging technique that smoothes out the peaks and troughs over time. And, as a matter of course, your product offerings are created to ensure that they thrive when volatility knocks, if the timing is right.

The truth is that investors in structured products have been buying some or other version of volatility from the minute they signed up; whether they have understood this is a different issue. The initial enticement to buy a product is stirred, generally, by the sight of a graph showing an index which will be used as the basis for their decision-making. Often sidelined by the other benefits on offer, buyers have been happy so far to look at such illustrations without really questioning the degree of volatility they were subscribing to.

In an investigation of the effects of the credit crunch on equity-linked and credit-based structured products that we have carried out in this issue of the magazine, it would appear that those clever and busy structurers have yet to develop a product that is linked solely to volatility, although they are turning out volatility-related products by the dozen. For structured credit markets, the picture is rather bleak, as hopes for the development of a market for constant proportion debt obligation products are dashed by events in the broader financial markets. That said, bankers claim that structured products based on rates have fared better than might have first been expected, as the switch to steepeners continues.

There isn't an answer to the question of where the financial markets go next, and that has to mean that the almost secluded world of structured products also has to wait. Obviously, equity market sentiment will be the key driver, and surely more than the return from holiday of the beach Blackberry mob.