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."
