The Hedge Fund Report: Another Way to Bet With Pros

Want exposure to hedge funds without investing directly in one? Need access to the alternative asset class while at the same time preserving capital? The answer may be a structured product, a semi-exotic investment instrument in which a derivative facilitates exposure to a basket of funds or an index.

In some cases, the instrument is a financial contract. In others, it is a note. In Europe, where structured products are perceived as a good way for retail investors to access alternative investments, these vehicles have become very popular. They are starting to get attention in the U.S., although for different reasons.

Part of the appeal of structured products is that they can offer protection against downside risk. For instance, with a structured note, the investor recoups his principal at maturity, plus hedge funds returns, if any. Because these instruments are hard to design, however, the guarantee often comes at a cost. To counter that, banks that structure those derivatives often use leverage or options to enhance returns. ...