If you've been keeping up with the activities of financial industry watchdog FINRA (Financial Industry Regulatory Agency) like we have, you've probably noticed an important trend: FINRA has issued a number of warnings recently about complex financial products that have made their way into investor portfolios, sometimes without investors realizing just how complex and--more to the point--how risky they actually are.
The latest warning concerned so-called "Alternative Mutual Funds," which contain more exotic strategies and asset mixes than their traditional counterparts, including hedging and leveraging through derivatives and short-selling. According to a recent Reuters article, these Alt Funds, which can resemble hedge funds but remain subject to the regulation by the Investment Company Act of 1940, have become increasingly popular in recent years as investors seek greater yields while trying to avoid getting burned like they did in 2008. Whatever their motivation, investors need to be exercise all due caution when considering purchasing Alt Funds because these funds may conceal risks that the unsophisticated and sophisticated investors alike may not be fully aware of.
If you or your investment advisor are thinking about buying into an Alternative Mutual Fund, FINRA's Investor Alert on the subject strongly suggests taking a close look at the following points: Investment Structure, Strategy Risks, Investment Objectives, Operating Expenses, Fund Manager, and Performance History. Investigating these points will provide you with greater insight into a financial product whose complexity will almost certainly raise suitability issues in the near future. Indeed, if past experience is any indication, FINRA's Investor Alert portends greater scrutiny of not only this product but of brokers and investment advisors who see fit to recommend Alt Funds to clients.