People should not invest in derivatives if they do not understand them, an investment advisor said yesterday.

But investors can "learn to live with derivatives successfully'', and they may not have a choice if they want to stay competitive, said the founder of New York-based Capital Market Risk Advisors, Inc. (CMRA).

Mutual funds without a derivative component could become "uncompetitive'' in the 1990s, said Ms Leslie Rahl, principal of CMRA, speaking at the sixth annual seminar on the Globalisation of Mutual Funds at the Southampton Princess yesterday.

Derivatives are a modest but relatively important part of mutual fund activity, she said. Understanding them can be a daunting challenge but the financial instruments are extremely valuable and those who take the time to understand them are satisfied, she said.

Derivatives vaulted into the limelight with the recent financial collapses of Orange County and Barings Plc.

Orange County lost $2 billion linked to investments in structured notes while Barings was brought down by $1.46 billion in Nikkei Index Futures losses, she said.

But many defended the controversial investment instrument saying that if understood, they are essential and beneficial to investors.

A derivative is a financial instrument which derives its value from another financial instrument; Swaps, options, and warrants are examples.

With understanding the nature of the derivative, the investor can understand the risk or the exposure, said Ms Rahl, adding that she has seen $10 million transactions with exposure as high as $1 billion on that $10 million transaction.

"If you don't understand it, don't buy it,'' she said.

Prior to founding CMRA, Ms Rahl was president of Leslie Rahl Associates Inc., a consulting firm specialising in swaps, options and derivatives.

Prior to that, for nine years, she led a Citibank swaps and derivatives team of 45 traders, 30 originators/financial engineers and ten researchers.

In 1994, publicly disclosed derivatives losses escalated to $13.55 billion compared to $3.95 billion in 1993.

Prior to last year, the losses had grown slowly from $1.15 billion in 1987 to $2.23 billion in 1992.

Derivatives are receiving attention as there is a huge increase in law suits linked to that financial instrument, she said.

Updated controls, in-depth training, a self risk audit, and written policies and controls are among the moves that can be taken to minimise risk, she said.

The seminar, presented by the International Bar Association Section on Business Law and the Investment Company Institute, commenced on Sunday and covers several legal and business issues on the globalisation of mutual funds, concludes today.