Liquid alts get warning from SEC's Norm Champ

SEC official tells alternative mutual funds to define principal strategies for investors

Oct 29, 2014 @ 11:43 am

By Mark Schoeff Jr.

+ Zoom

An alternative mutual fund may consider a number of ways to exceed market returns, but it should identify the ones it's most likely to use, a Securities and Exchange Commission official told members of the industry on Wednesday.

Norm Champ, director of the SEC's Division of Investment Management, said the agency is noticing that funds are providing a laundry list of strategies in their disclosure forms. In practice, they may only use a handful of them. That kind of “disconnect” will draw the SEC's attention because it could mislead investors about the risks they're taking with the funds.

“If we find gaps between what you told us you're going to do and what you're doing, that could become an issue,” Mr. Champ said at a Securities Industry and Financial Markets Association conference in New York. “You've got to make sure retail investors have enough information to make an informed decision about what they're buying, and that's particularly true with respect to alternative mutual funds and complex strategies.”

Alternative mutual funds employ investments and strategies above and beyond traditional long stock and bond holdings to try to produce returns uncorrelated to the overall market. They've become increasingly popular as a way to diversify portfolios. At the end of September, alternative mutual funds had $282 billion in total assets. At the end of 2013, they represented 2.3% of the fund market but accounted for 32.4% of fund inflows for the year.

Although the SEC has not indicated it is contemplating regulations related to alternative mutual funds, the regulator has made clear that they are an area of concern.

Wednesday's speech was the third that Mr. Champ has given on the investment vehicles over the last year. In June, he spoke about the value, liquidity and leverage risks they pose. In September, he outlined potential compliance problems for managers of alternative and traditional funds, as they try to enter each other's segment.

On Wednesday, Mr. Champ underscored that disclosure is not a one-and-done activity. In a dynamic market, alternative strategies can frequently be adjusted, making the original disclosure — and the risk profile — outdated. Funds need to make disclosure an “ongoing review.”

“You've got to make sure you match your disclosure to what you're actually doing,” Mr. Champ said.

The popularity of alternative mutual funds will grow, industry representatives said at the SIFMA conference.

“We'll see it as a common part of portfolios,” said Michael Dworacek, a director and head of investment product support at Bank of America Merrill Lynch.

Another industry official predicted it might take seven years for alternatives to become “mainstream products” because investment advisers and brokers, as well as investors, need time to learn more about them.

“In the interim, we have a pretty significant education hurdle,” said Gary Wendler, managing director and head of product development at Invesco. “We're spending a lot of time and effort on that and will continue to do so.”

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

Events

The Fuse impact: The judges weigh in

When vying for top honors at Fuse, it all comes down to a panel of judges. Hear directly from them on what they're looking for in finalists, and what gets them excited about this event every year.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

HighTower faces pressure to let investors cash out

After an IPO planned for last year didn't happen, the company could opt to satisfy its backers with a sale.

Envestnet to buy FolioDynamix

The deal, which is expected to close in the first quarter of 2018, will bring the total assets Envestnet works with to almost $2 trillion.

Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry

After a decade of litigation, fees are lower and retirement plans are more transparent. But have the lawsuits gone too far?

10 best financial adviser jokes

How many financial advisers does it take to screw in a lightbulb?

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print