Indeed, it's been interesting how often financial engineering pops up, usually in the guise of derivatives. Well, I suppose it's not too surprising to find it in WSJ and Economist articles--but they are references that would have gone over my head just 6 months ago, before I started learning about the subject.
Here are two articles, one from the WSJ and one from the Economist. The WSJ article is from earlier this week
The hedge-fund tactics the headline refers to are primarily trading in derivatives:
Pressured by weak stock-market returns and greater competition for investors' money, a growing number of mutual funds are making use of investment strategies typically found in riskier hedge funds.
A number of major mutual-fund companies, including Allianz Global Investors, Julius Baer Holding AG's GAM subsidiary, and Alliance Capital Management's AllianceBernstein, have recently asked fund shareholders for permission to change the rules governing how they can invest to include a range of hedge-fund-like investment strategies. Some of the new techniques being adopted include making complex derivative trades, investing with borrowed money and short selling. (Short selling involves selling borrowed shares in order to profit from an expected price decline.) Even some conservative U.S. government bond funds are adding risk with more derivative strategies.
And later in the article:
The biggest changes are coming in traditional stock funds, a number of which are now shorting stocks for the first time and using complicated derivatives, which are financial contracts whose value is based on -- or derived from -- some underlying stock, currency, commodity or other investment. To be sure, some mutual funds have long used basic derivatives, such as stock-index futures, but a growing number are now expanding into more exotic types. Oppenheimer shareholders last month approved plans to allow several of the company's funds to trade derivative contracts tied to the price of commodities or currencies....
Bond funds, too, are changing tactics to boost returns. Shareholders of Seligman U.S. Government Securities fund voted recently to allow the fund to increase its investments in bonds that don't have government backing and in derivatives. And Principal Global late last year altered its government bond fund to begin including commercial mortgage-backed securities and using derivative strategies.
Predictably, the article spins this as a risky move, which indeed it may be, depending on how a given fund trades in derivatives. But an overarching theme of derivatives is that there are two sides to every trade in them: they allow for risky speculation on one side, but they allow for hedging of risk on the other side. A fund which allows itself to trade in currency derivatives could very well use them to reduce the currency risk to which its shareholders are exposed via its other (equity or bond) holdings.
The 2nd article I was going to post is an Economist article from a few months ago. Surprisingly, there was a reference to derivatives was buried inside an interesting article about alternative energy.
But I can't find the link right now, and I've got to get going. So that one will have to wait.
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