The Financial Industry Regulatory Authority is warning investors about the risks of treating alternative mutual funds like traditional mutual funds, citing “alt” mutual funds’ more nontraditional investment holdings and more complex trading strategies.
In an investor alert released Tuesday, FINRA noted that alt mutual funds, which are publicly offered, SEC-registered funds regulated under the Investment Company Act of 1940, use investment strategies that differ from the buy-and-hold strategy typical in the mutual fund industry. For instance, alt funds might invest in assets such as global real estate, commodities, leveraged loans, startup companies and unlisted securities that offer exposure beyond traditional stocks, bonds and cash.
These alt funds also may employ complex strategies, including hedging and leveraging through derivatives and short selling, FINRA notes. Some alt funds are also structured as a fund containing numerous alternative funds.
Gerri Walsh, FINRA’s senior vice president for Investor Education, noted in releasing the alert that “Investors should fully understand the strategies and risks of any alternative mutual fund they are considering. FINRA is warning investors to carefully consider not only how an alt fund works, but how it might fit into their overall portfolio before investing.”