What you have to remember is that derivatives are a very recent phenomenon. Most of the products have been around for less than a decade and outside of the fixed income community they are virtually unknown. 99% of the population have never heard of an interest rate swap and i bet less than 10% of finance graduates would know how to price one. And interest rate swaps are among the simplest of derivatives products. So its perhaps not too surprising that your average fund manager has trouble dealing with the more complex structures.


The other key point is that people will stubbornly resist change. For the longest time, there was virtually no market for corporate bonds... people were simply unwilling to buy them on the basis that they could default. Of course this was just absurd and things have now changed, but the point is that it took a while for investors to abandon their irrational prejudices.


What happened in the 90s as new derivative products emerged was that a lot of investors didn't have a clue how to properly value them but got into the market anyways and got burned. This wasn't necessarily because they were being ripped off but because they didn't understand the risks. You would buy a structured note which gave you a very nice return and then one day became worthless as the Thai Baht devalued... not at all what you expected.


Whether this was the fault of overly aggressive wall street salesmen is a matter for debate(and lawsuits) but its certainly true and remains so today that the street continues to push derivative products and while clients are becoming more sophisticated, they have a long way to go.


Ok, about structuring. I know that to many, it will seem quite odd how you can take a bunch of products, put them together, add some packaging and a silly name and hope to make any money off it. But there is a lot of value in structured products. THe first has to do, as Paul mentioned, with the client's ignorance. Its like buying a bike which says some assembly required. All you really need is a screw driver but a lot of people will pay extra for a pre-assembled one.


There are also more substantial benefits to structured products. There could be tax advantages, regulatory issues(some clients may not be able to do certain asset classes) or even simple logistical ones. Lets take the coporate bond example. THis was just a simple case(not actual) which i threw out there, and you're right... all it takes is to buy the bonds and buy short term credit default protection. And thats the way any hedge fund would do it. But lets say you have a client who has never done default swaps. They might need to setup a new trading desk, get a bunch of lawyers to look over documentation, do risk reports, learn how to properly value them, mark to market, etc.


So whats scarce? Good people definitely, but if your question is why aren't we making a lot more money, then a large part of the answer is that clients are simply not doing enough business with us. I'm sure this is partly due to past experiences when they've been ripped off... but its also just human nature. THey don't want to get into new products and areas which they don't really understand even when it makes sense.