Mutual funds are loading up on derivatives and WSJ reporter Elenor Laise is scared swapless:
Derivatives can be used to boost returns, increase yield, get access to more-exotic asset classes like commodities or simply reduce risk. Indeed, many types of derivative-heavy funds thrived in recent years amid relatively placid markets. But in recent weeks, as markets have gyrated more wildly, the vulnerability of some of these funds has become more apparent.”
Nowadays fund investors have easy access to all sorts of esoteric investments. Alternative investments have become about as alternative as…well alternative music (read: not very alternative at all).
Of course derivatives are like bullets. Derivatives don’t kill portfolios, fund managers kill portfolios.
On the one hand, a relatively cheap ETF that tracks a single commodity is probably a “better” way to speculate on say, silver, then ordinary silver futures. On the other hand, by making commodity speculation easier, the fund industry attracts people who normally would stay far away. Before, when some commodity was up 100% in a year, hardly anybody knew it. Now anybody armed with a mutual fund screener will happen across all these exciting alternative investments. CNBC has almost morphed into a commodity price reporting service.
Fund managers are just trying to deliver exactly what investors want: more than traditional investments today can deliver. Investors are not happy with the low yields available today in both stocks and bonds. It’s almost impossible for a fund company to hide their 1%-1.5% fees and sales loads when the underlying investments – be it REITs, utility stocks, or whatever, yield a paltry 4%.
Mutual funds are loading up on derivatives and WSJ reporter Elenor Laise is scared swapless:
Derivatives can be used to boost returns, increase yield, get access to more-exotic asset classes like commodities or simply reduce risk. Indeed, many types of derivative-heavy funds thrived in recent years amid relatively placid markets. But in recent weeks, as markets have gyrated more wildly, the vulnerability of some of these funds has become more apparent.”
Nowadays fund investors have easy access to all sorts of esoteric investments. Alternative investments have become about as alternative as…well alternative music (read: not very alternative at all).
Of course derivatives are like bullets. Derivatives don’t kill portfolios, fund managers kill portfolios.
On the one hand, a relatively cheap ETF that tracks a single commodity is probably a “better” way to speculate on say, silver, then ordinary silver futures. On the other hand, by making commodity speculation easier, the fund industry attracts people who normally would stay far away. Before, when some commodity was up 100% in a year, hardly anybody knew it. Now anybody armed with a mutual fund screener will happen across all these exciting alternative investments. CNBC has almost morphed into a commodity price reporting service.
Fund managers are just trying to deliver exactly what investors want: more than traditional investments today can deliver. Investors are not happy with the low yields available today in both stocks and bonds. It’s almost impossible for a fund company to hide their 1%-1.5% fees and sales loads when the underlying investments – be it REITs, utility stocks, or whatever, yield a paltry 4%.
Link