FINRA Investor Alert l Alternative Funds Not Typical Mutual Funds

Securities Lawyer 101 l Brenda Hamilton Attorney

Today, the Financial Industry Regulatory Authority (“FINRA”) issued a new Investor Alert concerning investments in alternative hedge funds (“Alternative Funds”).  In the altert, FINRA cautioned investors about the unique characteristics and risks of  Alternative Funds which are not present in traditional investments such as stocks and bonds or traditional mutual funds. Alternative Funds employ complex investment stragies of invesment which involve high risks such as hedging hedging and leveraging through derivatives and short selling.Alternative Funds may also have complex structures that are comprised of numerous layers of companies and funds.

Gerri Walsh, FINRA’s Senior Vice President for Investor Education stated,

“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”.

FINRA’s investor alert urges investors to consider the following when contemplating an investment in an Alternative Fund.

Investment Structure of the Alternative Fund

Alternative Funds may offer greater diversification than a single-strategy fund but greater diversification may lead to a flattening of return and potentially to less transparency.

Strategy Risk Factors of the Alternative Fund

In addition to the usual market- and investment-specific risks mutual funds have,  Alternative Funds carry risks from the investment strategies they use.

Investment Objectives of the Alternative Fund

Investors should clearly understand the objectives of an Alternative Fund prior to investing. For example, one fund might be designed to capitalize on management’s expertise in a specific area, while another might seek exposure to commodities, currencies and other alternative investments.

Operating Expenses of the Alternative Fund

Investment fees of Alternative Funds can exceed those of traditional mutual funds. According to FINRA, the  average annual operating expense of an Alternative Fund is around 1.5 percent per year.

Fund Manager of the Alternative Fund

Investors should learn as much as possible about the manager of the Alternative Fund prior to investing.  They can  conduct searches of the fund manager’s professional background without charge by using FINRA BrokerCheck.

Performance History of the Alternative Fund

Many alternative funds have limited performance histories. A fair number were launched after 2008, so it is not known how they might perform in a down market. Investors should consider the risk of investing in a fund with a limited history of success, or no history at all.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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