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FINRA Warning on Alternative Funds

As we and others have noted, investors are increasingly moving assets into funds offering alternative strategies and the fund industry has responded by offering new products responding to investors’ interest.  (See, for example, our blog post highlighting last year’s annual survey by Morningstar and Barron’s on trends in this area.) At the same time, as we noted earlier this year, the SEC has indicated that it plans to give additional scrutiny to this area, whether through OCIE examinations or by considering additional regulation.  

Now, FINRA has issued a warning to investors on alternative funds.  The Warning, entitled “Alternative Funds are not your Typical Mutual Funds,” does not specifically discourage investors from using alternative funds. It states that investors should understand that these funds “use investment strategies that differ from the buy-and-hold strategy typical in the mutual fund industry” and that “an alternative fund typically holds more non-traditional investments and employs more complex trading strategies.”  The Warning both urges that investors “comparison shop” and that they be aware of these funds’ “unique characteristics and risks.”  More specifically, the Warning encourages investors to focus on the investment structure, strategy risk factors, investment objectives, operating expenses, fund manager and performance history of any alternative fund in which they may be considering investing.

The FINRA Warning can be read in its entirety here and FINRA’s press release announcing the warning can be accessed here.