There is no doubt that recent data shows investors have given these products the cold shoulder. December saw a 37 per cent fall in sales compared to the previous year according to industry data provider www.StructuredRetailProducts.com. In some Asian jurisdictions, such as Hong Kong and Singapore, sales have all but dried up.

Whilst his firm is currently compiling data for the full year 2008, StructuredRetailProducts managing director and head of Arête Consulting, Robert Benson, gave WealthBriefing an early heads up on what the figures are showing.

“We expect global sales in 2008 will be up only 4.5 per cent year-on-year - the smallest rise on record,” Mr Benson said.

Part of the problem has been how the sector was battered by the bankruptcy of Lehman Brothers, the US investment bank that designed and in some cases underwrote a swathe of these products.

Around 18 months ago, Lehman’s was extremely competitive in the structured products market and “paid up” because its credit quality was not as strong as its competitors, Mr Benson said. As a consequence, it was a prolific product provider. The impact of Lehman’s demise has been significant on the structured product market both because they were active in structured products all around the world as a provider of over-the-counter hedging and as an issuer into the public markets.

Whilst Mr Benson anticipates that sales will recover in the second half of 2009, they are likely to remain at current levels for the next few months. “This would mean that overall global sales in 2009 would be down 16 per cent next year with Asia, and to a lesser extent the USA, the most badly affected regions,” he said.

The outlook for structured products in the wealth management space is perhaps less gloomy than the retail market. In a recent poll, WealthBriefing’s readers said the market would not see shrinkage or fewer new products following Lehman Bros bankruptcy.

Phil Cutts, vice president and director, RBC Wealth Management, said structured products continue to be a good way for private clients to invest funds when markets are volatile. “At the moment, clients have a heightened awareness that market falls really can happen and are therefore placing high value on a good degree of capital protection,” Mr Cutts said.

Ashok Shah, chief investment officer, of London and Capital, said that whilst the structured products markets “looked pretty dicey a couple of months ago” he believes this market has seen the worst of any falling sales. He sees two main ways in which the market has been affected, citing certain types of product. “On the one hand, with very plain vanilla 3-5 year bonds which are fully capital guaranteed, 70-80 per cent is invested in a zero coupon bond and the residue in a short or long term option on the equity market,” he explained.

Heightened volatility has made the option element in these products more expensive and exposure to the same potential returns now costs more to buy and investors get lower returns than two or three years ago.

Mr Cutts said part of the "Lehman effect" is that investors and their advisors want strong credit ratings from the institutions that underwrite structured products. Counterparty risk is now under the spotlight.

To highlight the issue, on Friday 19 December last year, 12 large financial institutions had their credit ratings cut by Standard & Poor's, the rating agency, which cited the "significant pressure on large complex financial institutions' future performance due to increasing bank industry risk and the deepening global economic slowdown".

Whilst Lehman’s poor credit quality was not directly reflected in its credit rating, it was indicated by the prices for credit default swaps, now a closely-watched barometer of default risk along with other measures such as bond yield spreads.

“Credit rating matters. Investors need to know that the institution providing the capital protection will be around at the end of the period, so it is critical that they are a strongly rated issuer,” said Mr Cutts, who added there are fewer issuers to choose from due to bankruptcies and bank takeovers.

London & Capital’s Mr Shah said the market for structured products will take up to a year to settle down. “We have seen the extent to which governments are willing to inject equity capital, which has increased faith in the zero coupon bonds. However, we have not returned to normal and it might take another 6-12 months,” he said.

Certain asset classes can fall in and out of favour as having a low-risk status.

“Assets migrate up and down the risk curve, all have their strengths and weaknesses and there are reasons to use each of them. It is important to evaluate whether the reasons for using them are still valid and whether they are still inside the risk corridor, or whether they have moved outside it – whether they are consumable or not,” Mr Shah said.

According to StructuredRetailProducts.com, investors’ increasing concerns over credit risk has translated into a large rise in sales of structured deposits like FDIC insured products in the US that benefit from government guarantees, as opposed to structured notes.

Mr Cutts notes that appetites have changed recently due to low interest rates. Whereas traditionally, at times like these, clients held cash, the asset currently offers minimal returns with central banks slashing interest rates. As a result, the most popular products are those offering the opportunity to boost income with an element of safety.

“Investors need structured products to provide yield enhancement and the opportunity cost is minimal at the moment. Alternatives like term deposits, government paper, FX linked deposits and corporate bonds are not offering much in the way of returns, so they are not giving up much,” said Mr Cutts.

The sorts of structured products that are currently getting RBC’s clients’ interest include capital protected FX range deposits - structures through which investors can earn an enhanced yield linked to the movement of exchange rates, should a currency pair remain within a set range over the lifetime of the investment, Mr Cutts said.

“There will always be an opportunity when there is volatility in a market and FX remains volatile, so these investments have proved popular of late,” Mr Cutts said.

RBC has also seen popularity amongst investors for ‘up and out’ notes of two year duration which pay out on any increase in the FTSE from current levels up to a maximum of 45 per cent. However, if the FTSE increases by more than this level, investors get 100 per cent of their initial investment back. Another live idea is ‘Rainbow’ notes linked to a basket of indices which offers a minimum of 15 per cent return plus the return from the worst performing of a basket of indices should all indices be above their initial level after five years or otherwise provide 100 per cent capital protection.

It seems that while the structured products industry has taken a beating, this is a temporary setback, not a permanent reverse. If providers move with the times and continue to adapt to meet the needs of the market in a low interest rate environment, structured products will regain their usefulness and popularity.

“Structured products were eminently usable in a stable world and will be again when we migrate back to a stable world,” concludes London & Capital’s Mr Shah.