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Derivatives can be used as an alternative investment.
But you must be sure you understand the derivative instrument and know what you’re doing, otherwise derivatives can be dangerous.
Many professional fund managers – particularly of hedge funds and absolute return funds – use derivatives.
Those same instruments are available to private retail investors. Ideally, they should be used to hedge a portfolio to lock in share prices if the investor fears the market will go down. But they can also be used to enhance returns.
Put options (to hedge against the market falling) and call options (to hedge against the market going up) are the safest derivatives.
Those instruments can be modified through other derivatives, such as the can-do option, a type of wrapper into which the investor can place other options depending on their view on the market.
Single stock futures have become popular, probably because they allow investors exposure to movements in a share price at 10% to 20% of the value of the share.
The deposit is paid into a margin account – and that’s the danger if the share price moves in the wrong direction, as the holder will be required to continue making payments into the margin account to cover the deposit.
Contracts for difference have also proved popular. That involves a contract with a counter party who will pay the investor on a long or short deal.
Used intelligently, all those instruments can boost portfolio performance. But care is the word: the investor must understand what he’s buying.
- Finweek
But you must be sure you understand the derivative instrument and know what you’re doing, otherwise derivatives can be dangerous.
Many professional fund managers – particularly of hedge funds and absolute return funds – use derivatives.
Those same instruments are available to private retail investors. Ideally, they should be used to hedge a portfolio to lock in share prices if the investor fears the market will go down. But they can also be used to enhance returns.
Put options (to hedge against the market falling) and call options (to hedge against the market going up) are the safest derivatives.
Those instruments can be modified through other derivatives, such as the can-do option, a type of wrapper into which the investor can place other options depending on their view on the market.
Single stock futures have become popular, probably because they allow investors exposure to movements in a share price at 10% to 20% of the value of the share.
The deposit is paid into a margin account – and that’s the danger if the share price moves in the wrong direction, as the holder will be required to continue making payments into the margin account to cover the deposit.
Contracts for difference have also proved popular. That involves a contract with a counter party who will pay the investor on a long or short deal.
Used intelligently, all those instruments can boost portfolio performance. But care is the word: the investor must understand what he’s buying.
- Finweek
