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Bond Funds Swimming Naked

Many of the bond mutual funds that posted losses in 2008 were hurt by the same crazy events that hit everyone else. But while manager after manager recites the same list of causes for his fund's painful losses, not all suffered the same level of decline. Usually, losses have been explained as untimely or wrongheaded sector calls. In a troubling turn, a number of mutual funds that made unusually concentrated or reckless sector bets borrowed money to create investment leverage, or have used derivatives in very speculative ways.

Eric Jacobson 05.03.2009

"You only find out who is swimming naked when the tide goes out."--Warren Buffett

And you thought the hedge fund gunslingers were the problem.

Most investors would guess that bond mutual fund managers simply buy bonds and go home. The ones playing with fire--derivatives, leverage, swaps, and all that fancy stuff--were the hedge fund sharpies charging outrageous fees to exclusive clubs of multimillionaires, right? More than a few mutual fund managers shared that view.

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About Author

Eric Jacobson  Eric Jacobson is a Senior Fund Analyst on the active funds research team with Morningstar.

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