Traditional long-only houses and hedge funds expect to increase their use of derivatives as they scramble to build capital protection or guarantees into products to lure scared and scarred investors back into the market.

Some 79 per cent of traditional and alternative houses expect to use more derivatives in the next 12-18 months according to a survey by Protiviti, a consultancy, with one of the prime drivers the need to provide more downside protection.

Investors have fled mainstream equity and bond funds in the past year as markets have slumped. A number of houses have responded by rolling out lower risk offerings, with some success.

Data released last week by the UK Investment Management Association showed that the tiny Guaranteed Protected Funds sector, accounting for just 0.4 per cent of the UK industry, was the most popular sector in terms of net flows into individual savings accounts in October, attracting £18.2m (€21.9m, $28m).

Separately, Arete Consulting said sales of structured products rose 15 per cent year-on-year in the first half of 2008 as investors switched out of traditional equity funds to guaranteed and protected products.

Rob Nieves, director of Protiviti, said: “We believe the fund management industry has reached an inflection point in its use of derivatives and they are here to stay as an asset class.”

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