The U.S. Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy published a bulletin on Friday that highlights the features and potential risks of “alternative mutual funds.”
These “alt funds” hold non-traditional investments, or use complex investment and trading strategies, which represent added risks to investors, the bulletin says.
“Alt funds have unique characteristics and risks. It is important that you understand these characteristics and risks to make sure the investment is a good fit for you,” the SEC’s bulletin says, setting out the factors investors should consider before buying into alt funds.
“In addition to the usual market and investment risks associated with traditional mutual funds, alt funds may face additional risks to the extent they use relatively complex investment and trading strategies,” the bulletin says. “Depending on the strategy being used, these potential risks can include use of derivatives and leverage, futures contracts, short selling and swaps.”
In addition, alt funds “may have higher expenses” than traditional mutual funds and many have limited performance histories.
The bulletin also details the differences between alt mutual funds and hedge funds. Although both vehicles may utilize similar trading strategies, they differ in how they are regulated.
In particular, alt funds are regulated as mutual funds, which provides additional protections, including limits on illiquid investments, restrictions on borrowings and debt, and the requirement to allow investors to sell their shares. Yet, hedge funds are generally limited to accredited investors. Also, the bulletin says that alt funds generally charge lower fees than hedge funds.
In Canada, securities regulators are currently considering rule changes that would enhance retail investor access to alt