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George Smaragdis (202) 728-8988
Nancy Condon (202) 728-8379


FINRA Issues New Investor Alert, Alternative Funds Are Not Your Typical Mutual Funds

WASHINGTON—The Financial Industry Regulatory Authority 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 unique 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.

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.

FINRA's new investor alert asks investors considering these funds to ensure that they fully understand the alt fund's:

  • Investment Structure: An alternative fund of funds may offer greater diversification than a single-strategy or even multi-strategy alt fund. At the same time, this greater diversification may lead to a flattening of return and potentially less transparency.
  • Strategy Risk Factors: In addition to the usual market- and investment-specific risks mutual funds have, alt funds carry risks from the strategies they use.
  • Investment Objectives: One fund might be designed to capitalize on management expertise in a specific area (e.g. investing in distressed companies), while another might seek exposure to commodities, currencies and other alternative investments.
  • Operating Expenses: Alternative mutual funds can be pricey relative to their traditional managed fund peers; the average annual operating expense is around 1.5 percent per year.
  • Fund Manager: Learn as much as you can about the fund manager, such as how long he or she has managed the fund. Research the professional background of a fund manager using FINRA BrokerCheck.
  • Performance History: Many alternative funds have limited performance histories. For example, a fair number were launched after 2008, so it is not known how they might perform in a down market.

FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms. For more information, please visit