The Financial Industry Regulatory Authority (FINRA) has issued a new Investor Alert called Alternative Funds Are Not Your Typical Mutual Funds to inform investors considering investing in alternative funds to be aware of the characteristics and risks of these investments.
Alternative or "alt" mutual funds are publicly offered, SEC-registered funds that hold more non-traditional investments and employ more complex trading strategies than traditional mutual funds.
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Alt funds might invest in assets such as global real estate, commodities, leveraged loans, start-up companies and unlisted securities that offer exposure beyond traditional stocks, bonds and cash. These funds also may employ complex strategies, including hedging and leveraging through derivatives and short selling.
Some alt funds are structured as a fund containing numerous alternative funds. Although the strategies and investments of alt funds may bring to mind those of hedge funds, alt funds are regulated under the Investment Company Act of 1940, which limits their operations in ways that do not apply to unregistered hedge funds.
"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," said Gerri Walsh, FINRA’s senior vice president for Investor Education.
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