SEC Director Warns About Recommending Alternative Mutual Funds To Certain Investors

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations Director Andrew Bowden says that investment advisers should be careful when putting investors in alternative mutual funds. The agency says there has been a rise in complex trading strategies in mutual funds and nontraditional investments, with assets in alternative mutual funds reaching $168 billion in October. This is an increase from the $158 billion achieved the previous year.

While using these mutual funds may raise returns, investors can be placed at greater risk in the event that the market were to drop, especially if these products involved have limited secondary markets. Bowden says the agency intends to conduct a sweep of the $200 billion alternative find industry and examine the way it uses specific private fund strategies in public-traded investments.

It was last month that the SEC announced that it would look at both hedge fund and alternative investment strategies in exchange-traded funds, open-ended funds, and variable annuity structures. The regulator wants to look at if the ways that the funds are being promoted comply with regulations.

Alternative Mutual Funds
These funds try to meet the fund’s goals via non-traditional trading strategies and investments. For example, an alternative mutual fund might get involved in commodities, global real estate, start-up companies, and unlisted securities. Strategies for alternative mutual funds tend to be more complex, such as leveraging and hedging via derivatives, and can include short selling. Depending on the alternative fund, mutual strategies or a single strategy may be involved.

The Financial Industry Regulatory Authority is recommending that investors consider numerous factors before deciding whether to get involved in alternative funds, including:

• Does the investment structure, which can provide more diversification than other options, work for you?

• What are the risks involved and can you handle them?

• Know the objectives of the investment and if they are in line with your own investment goals.

• Find out operating costs and whether you can afford them.

• Make sure that your fund manager is experienced enough to handle alternative mutual funds and knows how to advise you and take care of your money.

• Look at the history of performance of a fund to give you a sense of what you are signing up for.

• Determine whether there are there are less costly, less complex investment choices that might be able to help you meet your financial goals.

Our securities fraud lawyers represent investors seeking to recover their alternative mutual fund fraud losses. Sometimes these losses are a result of misrepresentations, omissions, and inappropriate investment advice from a financial representative. Contact The SSEK Partners Group today. We represent investors in litigation and in arbitration. Our FINRA arbitration lawyers work with individual and institutional investors.

U.S. SEC to examine fund fees, alternative funds, Reuters, March 8, 2013

SEC exam director warns advisers about use of alternative mutual fund, Investment News, March 6, 2014

Alternative Funds Are Not Your Typical Mutual Funds, FINRA

More Blog Posts:
Are Alternative Investments Good for Investors?, Stockbroker Fraud Blog, October 30, 2013

US Chamber of Commerce Wants Treasury Secretary to Let SEC Finish Study About Money Market Mutual Funds Before Pressing for Action, Institutional Investor Securities Blog, November 15, 2012