June 11, 2013 / 6:46 PM / 6 years ago

FINRA warns investors on alternative mutual funds

NEW YORK (Reuters) - Wall Street’s industry-funded watchdog warned investors on Tuesday about the risks associated with so-called alternative mutual funds.

Alternative funds choose more exotic strategies and asset mixes than their traditional counterparts, and they have been particularly popular in recent years as investors have sought to squeeze out extra yields and protect themselves from a 2008-style market rout.

The funds have $176.2 billion in assets under management as of May, up from nearly $32.8 billion in 2008, according to data from Lipper, a Thomson Reuters service.

The Financial Industry Regulatory Authority (FINRA) has voiced concern before about the complexities of alternative investments. Its new alert, titled “Alternative Funds Are Not Your Typical Mutual Funds,” encourages investors to look at the specific risk factors of the investment strategies, like options and leverage, that are sometimes used by alternative fund managers.

“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,” Gerri Walsh, FINRA’s senior vice president for investor education, said in a statement.

It the latest in a series of warnings FINRA has aimed at investors since the financial crisis. The regulator has also published alerts telling investors to consider risks carefully before wading into privately traded securities and real estate investment trusts, among other investments.

Low interest rates and stock-market fears have pushed investors toward higher yielding alternatives, and have prompted more Wall Street firms to offer their clients an expanding buffet of so-called alternatives. But not all advisers and investors understand the risks involved, Richard Ketchum, FINRA’s chairman and chief executive, told Reuters reporters last week. He voiced concern that some alternative investments might be less liquid than mom-and-pop investors realize.

The term “alternatives” can cover a broad array of investment strategies ranging from commodities and currency trading to hedge funds and short-biased market exposure. Ketchum noted last week that he was particularly concerned about alternative funds that turn around and invest in shares of hedge funds.

The Authority also cautioned investors to scrutinize the investment objectives, performance history and fund manager of alternative funds before investing in them.

Reporting By Trevor Hunnicutt; Editing by Linda Stern and Chris Reese

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