Structured products in Asia have slunk into the shadows ever since Lehman Brothers introduced the words “counterparty risk” to thousands of retail investors.
But the investment class still offers value to those who know how to use it, while those selling the products have embraced simplicity and education in an effort to improve understanding among investors.
Structured products – synthetic investments that give holders exposure to an underlying asset or strategy without having to actually own the underlyings – fell into disfavour in 2008 when Lehman Brothers, which had been one of the major issuers of structured products, filed for bankruptcy.
In an instant, structured notes that had been backed by Lehman Brothers’ credit lost value, even if the notes had offered principal protection.
Several of those products were sold to retail investors, many of whom had not understood that their principal would be at risk if Lehman went under. A number of distributors were reprimanded.
The structured products industry responded by turning back the clock, shifting away from complex structures towards simpler products. There was a much stronger push to improve investor education and an emphasis on suitability – making sure that customers are sold only products that are appropriate to them.
Sales of structured products also shifted away from retail and moved more into the realm of private banks and high net worth individuals.