Flood into liquid alts bears watching

Understanding the investment strategy employed in the funds — long/short, managed futures, global macro, etc. — and checking the fund and fund manager's tenure is key.
JUL 25, 2014
By  MFXFeeder
The heat is on this summer. And for the fastest-growing segment of the mutual fund industry, the temperature will continue to rise as the SEC begins its first phase of “sweep” exams. The target under the Securities and Exchange Commission's 2014 exam priorities is alternative investments — including the mutual fund variety: liquid alts. As InvestmentNews reporter Trevor Hunnicutt has reported, the popularity of retail funds using alternative strategies has ballooned. In 2013, flows into such funds reached $40.7 billion, up from $14.6 billion in 2012. These funds now hold about $154 billion. The rush into liquid alts — largely attributed to investors' desperate reach for return in a low-rate environment while also trying to limit downside correlation with stocks — has caught the eye of regulators. And well it should. The commission plans to evaluate three areas of alternative investments, including the fundamentals of leverage, liquidity and valuation, and the makeup of boards and staffs. The third area — the way these funds are marketed to consumers and the suitability of recommendations — is something advisers should take to heart.

DUE DILIGENCE

Performing perfect due diligence on funds with minimal track records is not easy. But understanding the investment strategy employed in the fund — long/short, managed futures, global macro, etc. — and checking the fund and fund manager's tenure is a start. And when the adviser is confident that the fund meets a client's needs, that client must be educated on why the fund should be added to his or her portfolio. If an alternative investment's strategy is stability and non-correlation, for example, a client shouldn't be running to the adviser in a huff when the fund isn't matching the market's bull run. The SEC plans to focus on 25 fund families in its proactive sweep, beginning the exams this summer and likely spanning about six months. By that time, the cool weather will be back and whatever comes to light from the examinations will be instructive for this growing pool of alternative funds and the advisers who tap them for clients.

Latest News

'Bogged down' advisors just want to have fun (again)
'Bogged down' advisors just want to have fun (again)

Jim Cahn, of Wealth Enhancement Group, lifts the lid on his firm's partnership model, his views on RIA M&A, and the widely slept-on reason why advisors are merging into larger organizations.

Vestwell unveils new emergency savings account offering
Vestwell unveils new emergency savings account offering

The fintech firm is cementing its status in the workplace savings space with its latest ESA offering, which employers can integrate into their existing benefits package.

'Money Mimosas' and other ways to show your Valentine financial love
'Money Mimosas' and other ways to show your Valentine financial love

Wealth managers offer unique ideas for couples to grow closer emotionally and financially.

Limra research finds financial confidence on the rise among Black American workers
Limra research finds financial confidence on the rise among Black American workers

Survey findings suggest increased sense of financial security and more optimistic 2025 outlook, while highlighting employers' role in ensuring retirement readiness.

DOGE efforts sideswipe muni bonds backed by federal lease payments
DOGE efforts sideswipe muni bonds backed by federal lease payments

Falling prices for some securities within the $4 trillion state and local government debt market spotlight how the push to shrink spending is sending shockwaves across the US.

SPONSORED Record growth: Interval funds emerge as key players in alternative investments

Blue Vault Alts Summit highlights the role of liquidity-focused funds in reshaping advisor strategies

SPONSORED Taylor Matthews on what's behind Farther's rapid growth

From 'no clients' to reshaping wealth management, Farther blends tech and trust to deliver family-office experience at scale.