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Are your Mutual Funds and ETFs disguised Hedge Funds? | Smith Investment Management

Are your Mutual Funds and ETFs disguised Hedge Funds?

September 13, 2011 by  

A client asked me to look at some Van­guard Mutual Funds that he owns.

I was sur­prised at what I found in their “prospec­tuses” and “state­ment of addi­tional infor­ma­tion“.

  • There is no assur­ance that any deriv­a­tives strat­egy used by a fund’s advi­sor will succeed.
  • Cer­tain deriv­a­tives have the poten­tial for unlim­ited loss, regard­less of the size of the ini­tial investment.

Bot­tom line...

  1. They are using deriv­a­tives. They may be doing it intel­li­gently or fool­ishly, I don’t know, but they have given them­selves the rights to be involved with FUTURES, OPTIONS ON FUTURES, COMMODITIES, CURRENCIES, CDS (Credit default swaps).
  2. They give them­selves the right to use LEVERAGE (BORROWED MONEY)
  3. They lend cus­tomer secu­ri­ties to other institutions.


It was a wake up call to me to review all invest­ments and look for hid­den risks.

If you look into your own mutual funds and find some­thing inter­est­ing please let me know.


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