FINRA issued an informative guide about the risks and rewards of alternative mutual funds, just as some experts are calling for their use in DC plans to mirror DB returns and as individual investors continue to pour money into them.
Alts may include non-traditional investments and strategies like global real estate, commodities, leveraged loans, start-ups and unlisted securities employing complex strategies like hedging, derivatives and short selling, as well as opportunistic investing. Some alts might seek higher return while others look to smooth out volatility or seek greater diversification.
Unlike hedge funds, alt MFs are ‘40 Act funds, have limit on illiquid assets and leveraging, and include diversification requirements as well as daily pricing and redemption. In addition, they cannot charge the traditional 2/20 hedge pricing or 2% annual assets fee and 20% of profits.
According to FINRA, the pro’s and con’s of alts include:
• flattening of returns
• additional risks
• higher expenses
• limited performance history
