Too hot for investors to handle?

Do derivatives still have a place within the investment world and can they be used within fixed income portfolios to more effectively manage the risks associated with bond investing?

In his 2002 annual report to Berkshire Hathaway shareholders, Warren Buffett explained at great length his reasons for exiting the derivatives business and expressed in unequivocal terms his concerns regarding the rapidly expanding derivatives market. Buffett pointed to the demise of Long-Term Capital Management in 1998, which had to be rescued by the US Federal Reserve in order to prevent the contagion spreading and other institutions falling, as an alarm bell that was not being heeded. It was in this annual report Buffett labelled derivatives as being “financial weapons of mass dest...