By now you may be asking yourself, how can I tell if the funds I own use derivatives? It's a good question, as investors have the right to know how money they entrust to a fund company is being invested. However, disclosure of derivative use by funds unfortunately has been inconsistent.
Further exacerbating the transparency problem is the fact that, while some derivatives, such as futures, are traded on regulated exchanges, others, including swaps, are traded privately in the over-the-counter market, potentially adding credit risk.
The use of derivatives by some funds makes knowing how your fund works that much more important. Used properly, they can help manage risk and foster innovative investing strategies. But used irresponsibly, they can court disaster. As an investor, you owe it to yourself to understand how your fund works and whether derivatives are part of its approach. And if your fund company is less-than-forthcoming with this information, you have every right to demand it.