Derivatives Investing: Strategies for Enhanced Returns | Investment Manager Research

An investment manager research will include a look at derivative securities as a way to bolster returns and increase yields for investors. Derivatives are a useful tool that help investors increase income. A good investment manager will research ways in which to appropriately incorporate derivatives in a way that adds value to the portfolio and does not increase the potential for volatility or loss due to the improper management of a derivative.

What Is a Derivative?

A derivative is any security that is derived from some underlying investment asset such as stocks and bonds. A common derivative that everyday investors employ in their portfolios is an option contract. An option can be a promise to buy or sell the underlying stock in which the contract is based on at some predetermined time in the future. There are more exotic forms of derivatives available that provide opportunities for leveraging a portfolio’s assets and increasing returns exponentially.

Risks Inherent to Derivatives

The risks inherent with a derivative includes the possibility that the market movement will not be as expected resulting in a requirement to deliver a security or come up with the money necessary to close out a position. In the most extreme situation, being on the wrong side of a derivative contract results in systemic risk, which ultimately leads to the collapse of the financial markets.