FOLLOWING THE United States Federal Reserve decision last month to leave its federal funds rate unchanged, HSBC began offering a capital protected interest rate-linked product to customers who believe rates will now stay flat or retreat. Bruno Lee, head of wealth management for Asia Pacific in HSBC's personal financial services division, said customers might now have a clearer view of the rates environment. 'We wrote this in anticipation that there were customers who now have a firmer view on the rate environment. After the last Fed meeting customers generally had a clearer view on rates and there was an increase in demand,' he said. Tenors for the product range from three months to three years. At the end of each quarter, the rate of return on the contracts is calculated by subtracting the rate at the start of the contract with the current rate, and multiplying the result by a factor of usually either 10 or 12. Three-month US dollar Libor (London interbank offered rate) is used for the contract benchmark. If, for example, this rate drops by 0.25 percentage points over the quarter, the contract would earn an annualised return of 2.5 per cent (0.25 times a factor of 10). The contract thus protects investors against the declining rates trend, but with the downside of earning no interest at all if rates rise. Mr Lee said equity-linked structured products were also popular with investors at present. Typically, such a contract would be written on stock indexes or specific shares, and are effectively put options. This means the investor agrees to buy the index or stock at a strike price that is set at about 90 per cent of the prevailing market price. Returns are computed by comparing the closing price with the strike price every day. If the market price keeps rising, the contract will be in the black. The downside is that if the strike price falls below the market price at maturity, the contract holder will have to buy the stock and take a loss on his principal. 'This means there is a risk attached since the product is not principal protected and the investor could lose capital if the stock price falls below the strike price,' Mr Lee said. Signs of a US economic slowdown and gathering market uncertainties had seen UBS clients turning to relatively conservative investments of short tenor and being more focused on yield enhancement or market neutral strategies, said Lim Leong-guan, managing director and head of product development Asia for UBS Wealth Management. 'Market neutral strategies are getting popular, for example, outperformance notes with payoff depending on the relative performance between, for example, two stock indices, two baskets of different stocks, or a basket of stocks versus index,' said Mr Lim. 'Investors profit from the outperformance of one index compared to another, irrespective of market direction.'