In August 2014, Securities and Exchange Commission disclosed an investigation into alternative mutual funds because of concerns about the harm that they might cause to ordinary investors who are attracted by returns that potentially are higher than are those for traditional mutual funds.
Alternative mutual funds, which are traded the way that traditional mutual funds are, use the same strategies and investment categories that hedge funds use, experts say. Consequently, they’re more speculative and, thus, riskier than many investors realize.
Experts say SEC’s concern is well-founded. Whereas traditional mutual funds typically invest in stocks or bonds, alternative mutual funds might invest in, say, global real estate or leveraged loans, according to Financial Industry Regulatory Authority.
For example, an alternative mutual fund might invest in distressed bonds, where investors could lose money if the bonds were liquidated, says Iqbal Mansur, who is a finance professor at Widener University. He and other experts say investors are confused about the market.
Four experts advise that consumers who are interested in investing in alternative mutual funds should understand a specific fund’s investments. Three say no more than 10 percent of any portfolio should be invested in alternative mutual funds.