David Coombs, investment director at Rathbones said that structured products are an attractive investment at the moment as the volatility makes for a better pricing environment.
"Structured products are looking interesting at the moment; the volatility has been looking up and getting better. We held lots of structured products in 2008 and these produced good returns, and I think they can do this again," he said.
"Structured products are a good alternative to bonds and hedge funds because the risk reward trade looks better off for auto-calls versus bonds and the returns are defined rather than the less predictable hedge fund returns."
Performance of the volatility index over 1-yr
Source: Financial Express Analytics
Sophie Barnett, vice president at Morgan Stanley agreed and said by looking at the terms of structured products she could see an improvement recently.
"Two of the most common used structures at the moment are the auto-callables and the reversed convertibles. These two have very good looking pricing and this is because they have benefited from the high volatility environment," Barnett said.
Looking at structured products as an alternative to bonds and hedge funds, Barnett said that as with any investment, investors need to consider how that instrument fits into their overall investment portfolio.
"In particular investors need to think what their individual investment objectives are and whether that product meets them. If they have invested and want capital protection, because they may still be slightly nervous and uncertain, but still want the potential for some upside then structured products can be an attractive solution for them but ultimately it's all about the investor's individual needs."
Recently launched offers
Source: Trustnet
David Wilcox, investment director at City Asset Management says structured products can be used as an alternative but only for part of the portfolio.
"They are one of the options and one of the tools in the tool box that you have to apply but it depends on market scenarios," he said.
Looking back six months ago, Wilcox said it was very difficult to get decent returns on structured products so the market was pricing very aggressively.
"Everyone looked at the future with rose tinted glasses so the pricing came down for everything. It is only when things are negative that you can achieve quite attractive growth return and levels of risk that we think are adequate. You can use structured products as an alternative to bonds and hedge funds but you have got very defined terms and very defined time horizons and therefore they are just one part of the portfolio as opposed to an alternative," he added.
Particular criticisms of the way structured products work featured in a recent article on Trustnet, following complaints against the industry by consumer champion watchdog Which?
Commenting on the relationship between volatility and structured products, Barnett said volatility is commonly known as the main pricing of structured products, but how it impacts the price depends on the individual structure.
Using fully capital protected products as an example of where volatility can benefit a structured product, Barnett said: "No matter where the markets go the product is designed to pay you your investment back at maturity. But higher volatility implies that there is more chance the underlying asset will fall in value and therefore that protection has more value to investors so it makes them more expensive."
Barnett says volatility has led to Morgan Stanley seeing a lot of interest in auto-call and reserve from the market.
"Providers like Morgan Stanley have been seeing this as an opportunity to get some good value products out there for investors. We saw volatility spike from the end of May and it is still above those long term averages," she explained.
According to data from Trustnet there are 35 current structured products which are due to close between 8 July and 15 September 2010.