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Credit Default Swaps: Is Your Fund at Risk?

Credit Default Swaps: Is Your Fund at Risk?

Complex financial instruments called credit default swaps have roiled the financial markets for months. They're at the heart of the bond insurers' woes and were a reason why insurance giant AIG (AIG) just added billions to a planned writedown. But if you think exposure to these derivative securities is limited only to insurers and investment banks, take a good look at your seemingly bland, conservative bond fund.

Start with the world's largest, Bill Gross's $120 billion Pimco Total Return fund. Gross railed against credit default swaps (CDS) in his January investor newsletter, calling them securitized weapons of mass destruction. But the latest holdings for his bond fund, as of Sept. 30, show more than 300 CDS positions, some as large as $200 million.