UNLIKE, SAY, THE manager of a long-only equity fund, who might find it difficult to pull in new customers during a bear market, a structured note seller is in the enviable position of being able to present clients with an upbeat investment case no matter what the market conditions. That’s because it is just as easy to engineer a derivatives-based investment that will increase in value when markets go down as it is to put together a product that will profit when markets are rising. They can even be structured to give an attractive return when markets are moving sideways. It is no surprise then that the credit crisis and subsequent increase in equity market volatility has not fazed structured note issuers. Indeed, they see opportunities, especially for selling to private bank networks, whose clients are relatively quick to take advantage of new opportunities compared with the broader retail market.
The big story, of course, is the increase in equity market volatility. Until the summer of last year, the world’s equity markets were characterized by perennially low volatility. Not so now. At the start of July, implied volatility on the S&P 500 stood around 15.