UPDATE 1-Investors must better evaluate derivatives-Treasury

(Adds details from prepared remarks)

WASHINGTON, Sept 26 (Reuters) - Investors and their fiduciaries must do a better job of evaluating the risks of increasingly complex securitized derivatives products, a senior U.S. Treasury official said on Wednesday.

Anthony Ryan, the Treasury's assistant secretary for financial markets, said complexity may well be a reason not to invest in a security, but it should not be an excuse for a buyer to justify a loss.

"Insufficient understanding or failure to perform an independent and adequate due diligence prior to making an investment decision is simply unacceptable. That's not investing -- that's gambling," he told an International Swaps and Derivatives Association (ISDA) conference in New York.

Ryan also said rapid ratings downgrades for many derivatives products may suggest the need for stronger market discipline.

He repeated that the President's Working Group on Financial Markets has launched an examination of recent market turmoil, including the impact of securitization and the role of ratings agencies in credit and mortgage markets.

On Tuesday, the Treasury asked pension fund investors and asset managers to make recommendations as to what information hedge funds should disclose to protect investors and strengthen U.S. capital markets.

Ryan said market participants, including ISDA and the Federal Reserve Bank of New York, have made progress in processing order backlogs, clearing and settlement, but "further collective and cooperative action is necessary to prevent and resolve other challenges."

Nonetheless, Ryan said financial innovation such as the development of credit derivatives have benefited investors greatly, citing improved management and transfer of credit risk, the unbundling and tranching of risk, enhanced liquidity and greater portfolio diversification.

"The ability to securitize credit has expanded the sources of capital and credit for homeowners, business owners and other borrowers throughout the global economy," Ryan said.