‘Structured products’ - investments that employ complex financial engineering to try to break the traditional tie between risk and return, or enhance tax efficiency etc - have taken a battering during this bear market. ‘Alternative investments’ of all stripes have tended not to hold up very well at all with hedge funds, who formerly made lots of big claims about being able to make money in all markets, suffering such losses that many have had to close their doors.

Guaranteed products which claim to offer equity returns with no downside risk (if held to maturity) have also proliferated. Recently, a severe blow to the credibility of these types of products was struck with the announcement by UBS that capital protection will not apply to loans it made to clients to invest in the failed Rubicon International Leaders Fund (Capital Protected Series 1).

This fund was protected with a ‘put option’ - a guarantee that some party will purchase your asset from you, if you want them to, at a pre-agreed price, even if the asset falls in value.

Apparently, because the fund was wound up, the put option is no longer able to operate. Investors who were under the impression that they would at least get their initial investment back at the product's planned maturity in 2015 have learned, to their dismay, that this guarantee does not apply if the fund was no longer in business.

Needless to say, such a revelation may only have been found in the fine print of the product's terms and conditions. Guaranteed products are usually marketed with large bold headlines stating that there is much to gain, with no risk of capital loss.

There are many types of guarantee, not all of which have this particular flaw.

For instance, a merchant bank has just released a product boasting access to blue chip shares with a capital guarantee. It achieves this by slicing 90% of your investment off into what amounts to a 5 year term deposit, the remaining 10% plonked into a raggedy old index fund. This strategy serves the bank well – it has cleverly found a way to charge up to a 1.5% fee for a cash investment.

If risk-free investments actually existed, paying higher than risk-free returns, the financial world doesn’t work. Think about it: it would be like living in a world where insurance companies happily insure buildings already on fire, and big business delights in paying a premium for what it can actually get for free.

There is no free lunch. Believing that risk and return can be separated is the financial equivalent of the tooth fairy.

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