Editorial

The world is clearly swept up in a commodities boom, and the floodgates to Asian markets have opened to a wide range of structured products linked to gold, silver, oil, aluminium, copper and agricultural produce. But Japanese investors have been slower than some Asian markets to warm to the idea of such products. Why?

The problem certainly has nothing to do with regulations. It's been 15 years since the Japanese government enacted the Commodities Fund Law and set up the Japan Commodities Fund Association, which now has 45 members. Dozens of Japanese brokers have been selling commodity futures funds to institutions, pension funds and high-net-worth investors. The Tokyo Commodities Exchange and the Tokyo Grain Exchange are among the oldest commodity exchanges in Asia.

The problem, bankers say, has partly to do with the fact that the stock market rally has fuelled demand for all kinds of equity-linked structured products, but diluted interest in commodity-linked investments. The high volatility of commodity prices has also been a dissuading factor.

Nevertheless, there's growing interest in the commodity asset class, and demand for equity-commodity hybrids in Japan has picked up in recent months. Most of the products have fairly conservative structures, with global commodity indexes and stock baskets used as underlyings. However, products referenced to single commodities, such as copper, have also emerged in Japan recently.

For the rest of Asia, while commodity-linked products are nothing new, the idea of investing in pure volatility instruments certainly is. The US, for example, is certainly more sophisticated with regard to its development of instruments such as Vix options, which were launched by the Chicago Board Options Exchange on February 24. This is an options contracts referencing the Vix index, which measures the weighted average implied volatility of eight at-the-money and near-at-the-money S&P 100 equity index options.

In Asia, some private-banking clients have shown interest in getting exposure to pure market volatility, and a product giving retail investors exposure to volatility in equity markets was recently rolled out in Singapore. But it's open to debate whether investors are buying the product specifically for exposure to volatility or have been drawn to the product by savvy marketing, or a bit of both. This issue's story on volatility trading tell us more.