U.S. securities regulators issued a new alert Tuesday, warning investors about the risks of investing in so-called alternative mutual funds that hold non-traditional assets and use complex trading strategies.
The U.S. Financial Industry Regulatory Authority (FINRA) issued an alert about so-called “alt funds”, which invest in alternative assets such as global real estate, commodities, leveraged loans, start-ups and unlisted securities, and may employ complex strategies, including hedging and leveraging through derivatives and short selling.
It cautions investors to fully understand an alt fund’s: investment structure; strategy risks; investment objectives; operating expenses, which are typically high, averaging 1.5%; and, the fund manager.
Additionally, it notes that many alternative funds have limited performance histories, since many were launched after 2008, “so it is not known how they might perform in a down market”, it says.
“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.