Derivatives are financial instruments that derive value from an underlying something--be it assets stocks, bonds, interest rates, commodities, real estate, currency, stock market indexes or even the weather. Options, swaps, futures and forwards are examples of derivatives. Derivative provide exposure to an asset without direct ownership of the asset. Derivatives are opaque, complex and in many cases lightly regulated. Professional investors use derivatives to speculate, hedge their bets, lock-in prices or leverage potential returns. For example, a gold futures contract gives you control over thousands of dollars of precious metal for a cash layout equaling a fraction of its total value. Since the 2008 global financial crisis, derivatives have been given bad press. As far back as 2002, Warren Buffett described them as “financial weapons of mass destruction.”

Writing the Book on Retirement Portfolios

Anyone thinking about retirement income should pick-up a copy of Retirement Portfolios by Michael Zwecher.  This recommendation applies to both financial...

Longevity Market Development Still in Infancy

A recent article in Bloomberg discusses the state of capital market solutions for the transfer of longevity risk . The reality is that the longevity market is still in its infancy and there are a number of obstacles that are affecting its development. One of the main hurdles involves the fact that longevity risk is very long-term in nature. Securities that mature over the course of 20 years are not hugely appealing to hedge fund managers who are providing quarterly performance reports to their...
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Bear Funds Struggle to Keep-up Over Time

Bear Funds or mutual funds that are intended to prosper during down markets have actually performed poorly over the past decade. One would think that the past decade would have provided the perfect environment for these types of investment vehicles. As reported in Bloomberg, though, a Pimco bear market mutual fund run by Bill Gross is the only fund of its type to beat U.S. stocks over the past five years. According the the Bloomberg article: "Bear funds trailed equities over five and 10 years,...

5 Reasons to Question the Recent Indexed Annuity Article in Bloomberg

An article on indexed annuities appeared in Bloomberg yesterday (click here to read).

The article is substantive and comes from a credible source.  It is provides a good explanation of why surrender fees need to be a front-and-center consideration for any consumer considering the purchase of an...

Pimco Bearish on the Prospect of Long Term Deflation

Pacific Investment Management Company (Pimco)--the large asset manager headed by Bill Gross--has taken a position that reflects skepticism of the possibility of long-term deflation in the United States. During the first half of 2010, Pimco entered into derivative contracts with a notional value of $8.1 billion.
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