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Galvin Targets Alt Mutual Fund Sales With Exam Sweep

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Massachusetts securities regulator William Galvin said Wednesday that he has launched an exam sweep of state registered advisors’ sales of alternative mutual funds offered by some of the largest money managers, as these products “can be accidents waiting to happen.”

While alternative mutual funds have grown in popularity because they offer liquidity and higher returns compared to other registered mutual funds, these funds can use investing strategies more commonly used by hedge funds “such as using derivatives to increase leverage as well as short-selling and trading in future contracts,” Galvin noted.

“With the higher returns come higher risks. The complexity of the trading activity also makes the product difficult for the average investor to understand.”

The Securities and Exchange Commission is worried about alternative mutual funds as well, with SEC Commissioner Kara Stein noting recently that alternative mutual funds “often operate in a gray area of mutual fund regulation. Most would not have envisioned these funds taking off even a couple of decades ago.”

A recently released report by alternatives data provider Prequin found that 16 alternative mutual funds were launched in the first half of 2015, about 1.5% of all hedge fund rollouts this year. Prequin found that alt mutual funds have come on strong in this decade, jumping from 34 launches in 2011 to 54 in 2012 and 56 in 2013.

The Massachusetts Securities Division has sent subpoenas to state-registered advisors requesting they provide documents to determine the firms’ supervision, compliance and training when recommending the alt mutual funds listed below to retail clients in the state.

A spokersperson in Galvin’s office said that just because an advisor is on the subpoena list it’s “not an indication of wrongdoing at this time.” The spokesperson declined to say how many advisors in the state are being questioned.

The alternative mutual funds Galvin is seeking more information from advisors on are:

  • AQR Multi-Strategy Alternative Fund
  • Arden Alternative Strategies Fund
  • BlackRock Multi-Manager Alternative Strategies Fund
  • Blackstone Alternative Multi-Manager Fund
  • Blackstone Alternative Multi-Strategy Fund
  • Collins Alternative Solutions Fund
  • Franklin K2 Alternative Strategies Fund
  • Guggenheim Series Multi-Hedge Strategies Fund
  • GuidePath Altegris Diversified Alternatives Allocation Fund
  • Hatteras Alpha Hedged Strategies Fund
  • Hatteras Alpha Hedged Strategies Variable Fund
  • IQ Hedge Multi-Strategy Plus Fund
  • JPMorgan Multi-Manager Alternatives Fund
  • New Century Alternative Strategies Portfolio
  • Global Multi-Strategy Fund (Principal Funds)
  • Ramius Hedged Alpha Fund
  • Russell Multi-Strategy Alternative Fund
  • Transamerica Multi-Manager Alternative Strategies Portfolio
  • Wells Fargo Advantage Alternative Strategies Fund
  • Wilmington Multi-Manager Alternatives Fund
  • Boston Partners Long/Short Research Fund
  • Eaton Vance Hedged Stock Fund
  • LoCorr Long/Short Equity Fund
  • Navigator Equity Hedged Fund
  • MainStay Marketfield Fund

— Related on ThinkAdvisor: Galvin Fines LPL $250K Over False Senior Designation Titles


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