What the new funds are doing
Some new research has found that many more new fund launches permit the use of derivatives as part of their investment strategy.
The research from independent financial research company Defaqto found an 87% increase in the number of funds launched recently that permit the use of derivatives.
In an uncertain economic and financial environment, it is perhaps unsurprising that fund managers are choosing to use derivatives to better manage risks within their funds.
A derivative is a financial instrument with its value linked to the price of something else. They include swaps, futures and options. Derivatives can be used to hedge risk within an investment portfolio, acting as a form of insurance against unwanted events.
The research also found a 39% decrease in the number of new fund launches that solely invest in the UK. This highlights a growing demand for funds investing overseas where the potential for greater returns is perceived to be higher.
It is also interesting to note what the new funds are doing. Just because new fund launches are using derivatives and investing internationally does not mean you should necessarily embrace these trends within your own portfolio.
Both trends create the potential for more risk within the fund, as fund managers can get their use of derivatives wrong and overseas investments tend to carry greater risks than those in the UK, for UK investors.