Alternative Mutual Funds
A New Complex Product Reaches the Market
For most of us ordinary mortals, all the hand-wringing that followed the collapse of our banking and mortgage system over too-complex financial products like derivatives and collateralized debt is still fairly fresh in our minds. Unfortunately, the allure of complexity and the money that tends to flock in its direction appears irresistible to bankers and ordinary investors alike. Enter the new and almost impenetrable darling of the investment world: alternative mutual funds.
According to Morningstar, the leading independent investment research agency, billions of dollars have recently found their way into these funds in effort to further diversify portfolios against market volatility. Currently, total assets in alt mutual funds hovers at around $234 billion. Just this year, around 55 new alt funds were introduced to market, bringing the total to 400 or so.
What is an Alt Mutual Fund?
“Alt funds contain far more exotic strategies and asset mixes than their traditional counterparts, including hedging and leveraging through derivatives and short-selling.”
Alternative mutual funds may share the same last part of the name of traditional “mutual funds,” but don’t be deceived: these are not conventional mutual funds. Alt funds contain far more exotic strategies and asset mixes than their traditional counterparts, including hedging and leveraging through derivatives and short-selling. And while a thoughtful and well-balanced mix of holdings and strategies may sound like just the thing to counteract market volatility, these funds may conceal risks and fees that the unsophisticated and sophisticated investors alike may not be fully aware of.
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.
One of the most recent latest warnings 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.
Are Alt Mutual Funds for You?
Whatever your motivation, as an investor you need to 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.
Unsuitable Investments in Alt Mutual Funds
At any rate, it seems that part of the increasing popularity of alt funds lies in the entrance of certain massive hedge funds--entrance through the back door, that is--into the retail investment market. It was only a matter of time before these sharks figured out a way to bait ordinary investors. But that doesn’t change the fact that the products they are pushing out to market are hardly suitable for most investors--and barely understood by even the most well-versed professional investment advisors. There’s a reason why only accredited investors are permitted by law to invest in hedge funds: they’re unregulated and very, very risky. Thanks to alt mutual funds, however, it seems that hedge funds have found a nifty way out of their gilded regulatory ghetto. And while every product has its use, we reserve the right to worry over the arrival of yet another asset class that the vast majority of investors can scarcely grasp--and so soon after horrific consequences of the last incarnation of greed-meets-complexity put all in such a very deep, very dark hole.
Pennsylvania & New Jersey Securities Litigation Lawyers
Our securities attorneys have over a decade of experience helping retail investors recover losses from stock brokers and national brokerage firms. We understand complex financial products and appreciate how stressful losing your wealth to an unscrupulous or negligent advisor can be. If you or anyone you know has been the victim of investment fraud or broker misconduct, please contact us immediately for a free consultation at 1-855-462-3330 or by using our online contact form.
