Alternative Funds’ Illiquidity Catches Regulators’ Eye

Alternative funds have grown from $33 billion to $456 billion in the last 10 years, according to Lipper data. But their lack of liquidity may spur new rules from the SEC, as the commission’s chair Mary Jo White noted in a speech last month.  

During the 2008 financial crisis, mutual funds overall held up well in terms of having enough cash on hand to make payouts to shareholders who chose to bail, but many hedge funds had to restrict withdrawals. The fear is that another severe market shock could stretch some alternative funds beyond the breaking point. Mutual funds that invest in leveraged loans — bank loans made to firms with low credit ratings with yields below those of junk bonds — are a particular focus, a New York Times article noted recently. 

The concern over leveraged loans may be resolving itself as investors pull money out of the riskier markets, the Times reports. According to Morningstar data, mutual and exchange-traded funds saw $13.8 billion in outflows in the first 11 months of last year, or about 10% of the $144 billion those funds held at the start of the year.