Investing in financial derivatives. Good or bad?

[Mark R]

I'm looking for a new home for my savings. I've ridden the commodities bull for a bit, and it's done me reasonably well, but the last buck was a bit violent, so perhaps it's time for a change.

Equities are looking good value, and financials particularly look good value (at least short term), especially after the doors to unlimited funding have been opened.

I'd been thinking of just jumping in with an S&P 500 or possibly sector ETF, however, the proshares ETFs caught my eye.

Unsurprisingly, the ultralong funds consist of the underlying equities with a swap for the leverage. The ultrashorts, however, are 100% swaps, albeit with cash held on deposit. Obviously, I understand the key risks with any fund, and the risks of advanced investment techinques. However, I'm struggling to quantify the counterparty risk. In the case of the proshares funds, it appears that the bulk of the money and exposure is in the ultrashorts, so presumably, one of the funds could act as counterparty, at least in part.

So,how much of an issue is counterparty failure? As the swaps seem to be with UBS, the Swiss bank, that are also apparently in trouble, should I, perhaps, run away from these funds?

 

[JEDI]

Originally posted by: Mark R
I'm looking for a new home for my savings. I've ridden the commodities bull for a bit, and it's done me reasonably well, but the last buck was a bit violent, so perhaps it's time for a change.

Equities are looking good value, and financials particularly look good value (at least short term), especially after the doors to unlimited funding have been opened.

I'd been thinking of just jumping in with an S&P 500 or possibly sector ETF, however, the proshares ETFs caught my eye.

Unsurprisingly, the ultralong funds consist of the underlying equities with a swap for the leverage. The ultrashorts, however, are 100% swaps, albeit with cash held on deposit. Obviously, I understand the key risks with any fund, and the risks of advanced investment techinques. However, I'm struggling to quantify the counterparty risk. In the case of the proshares funds, it appears that the bulk of the money and exposure is in the ultrashorts, so presumably, one of the funds could act as counterparty, at least in part.

So,how much of an issue is counterparty failure? As the swaps seem to be with UBS, the Swiss bank, that are also apparently in trouble, should I, perhaps, run away from these funds?

go do it. morgage your house to the max and put that into derivatives too.

if u fail, Bush will bail u out.

 

[IronWing]

REITs are where it's at. Seriously, asking ATOT for financial advice beyond spend less, save more is pointless.

 

[George P Burdell]

Rule #17: If you don't understand it well enough to explain it to your grandma, don't invest in it.

 

[LegendKiller]

Originally posted by: ironwing
REITs are where it's at. Seriously, asking ATOT for financial advice beyond spend less, save more is pointless.

There are some pretty smart people here with good financial knowledge. Don't dismiss that knowledge, as many times it's better than what you'd *PAY* a financial advisor for.

Some of the ultra short/long funds can get a bit wonky since they don't always follow underlying prices, especially since the price of the derivatives aren't linear with the underlying in all cases.

Tread lightly.

 

[TallBill]

Originally posted by: George P Burdell
Rule #17: If you don't understand it well enough to explain it to your grandma, don't invest in it.

That's not always true. Some grandmas are daft, and some investors are very smart. One of my friend trades all sorts of stuff that he wouldn't even be able to explain to me.

 

[imported_Lothar]

Originally posted by: George P Burdell
Rule #17: If you don't understand it well enough to explain it to your grandma, don't invest in it.

What he said.