Even as the SEC decided last month to put alternative mutual funds under the regulatory microscope, the investments are in a growth period as asset managers who offer the products seek to market their advantages to advisors and investors.
The SEC's broad examination of alternative mutual funds includes large and small players, but many industry experts do not believe increased scrutiny from Washington will affect their momentum going forward. The investments differ from other mutual funds since they have some hedge fund components to them including short selling, trading futures and utilizing derivatives.
"I think firms that have a lot of assets in this space should welcome the SEC examination," says David Lafftery, senior vice president at Natixis Global Asset Management, whose ASG Global Alternatives Fund launched five years ago had $2.98 billion in net assets as of Sept. 4. "I think it's important for the regulators to be able to understand what is going on."
A new research report issued by Cerulli Associates projects that alternative mutual funds will double their share of total mutual fund assets from 3% in 2013 to 6% in 2015. The Cerulli study cites requests for the investments from institutional investors and financial advisors along with increased interest from distributors as being key drivers of their popularity. As of Sept. 3, 49 alternative mutual funds had been launched with nine surpassing $100 million in net assets, according to data provided by Morningstar.
SEC officials say that their Office of Compliance Inspections and Examinations anticipates its current phase of the alternative mutual fund initiative will conduct exams at roughly 30 asset management companies that should be completed by April 1, 2015. The OCIE will then evaluate exam findings and determine if visits to other fund companies are needed.
Laffery says that if the SEC examination yields no major changes it will add further credibility to alternative mutual funds for asset managers when discussing the products with advisors and investor clients. He said education on alternative mutual funds has been a major focus since first arriving at the Boston-based firm in 2004 which has included meetings with advisors across the country. He says making the case for alternative mutual funds was an easier task when financial conditions were choppy between 2008 and 2010.
"It's a little bit more of a show-me sale now where as before it was more of a trust me sale," says Lafferty. "The hurdle is getting a bit higher."
Dan Sondhelm, a vice president and marketing consultant at SunStar Strategic, says he urges asset manager clients he works with who utilize alternative mutual funds to create whitepapers for advisors that contain "sophisticated" research documents with charts and graphs. He also recommends writing position papers that have "simpler" and shorter documents to go along with graphics.
"Thought leadership and content marketing are very important with these types of strategies because the underlying investments aren't necessarily typical stocks," says Sondhelm, who works with 40 asset managers on distribution and marketing strategies. "These more complex strategies require more content and education from people who are regarded as subject matter experts."
Bill Wostoupal, president of Northern Lights Distributors, says his company has worked hard to set up meetings with advisors at industry conferences to educate about alternative mutual funds. The subsidiary of NorthStar arranged for three clients who deal in the space, Grant Park Funds, Horizon Investments and Princeton Funds, to hold breakout sessions at the recently held LPL Focus Conference in San Diego. Wostoupal added that some constructive conversations with advisors are often held outside a booth they set up at conferences like at LPL.
"We try to get fund companies we deal with opportunities to be in a setting to educate," says Wostoupal. "We want more advisors to understand this product and how it works."
Publishing educational materials online and in pamphlets about alternative mutual funds is also crucial in addition to having a presence at conferences, according to Andy O'Rourke, chief marketing officer at Direxion Investments. The New York-based investment firm specializes in index-based alternative mutual funds.
"It's a matter of continual exposure and getting them to be more and more familiar with them," says O'Rourke, a former director of distribution marketing for MassMutual Financial Group's Retirement Services division. "I think we are in a healthy place for these products to thrive."
Peter Guarino, vice president of London-based global regulatory services provider Cordium, says he was surprised that the SEC's planned examination is not including the marketing practices of alternative mutual funds. Guarino is projecting that either the SEC will have a follow-up examination that addresses the sales practices of asset managers who deal in the alternative mutual fund space depending on initial review, or perhaps FINRA would take up the issue. He urges fund managers to take a close look at FINRA Regulatory Notice 12-03, which provides examples of possible procedures needed for supervising complex products like alternative mutual funds, and "reverse engineer" the language to produce policies the regulatory agency is expecting wholesalers to have proficiencies in.
"Sales questions have been and should remain an important issue for any fund company," says Guarino, who heads up Cordium's Investment Company Compliance Services initiative. "The issue out there now for these companies is alternative mutual funds are not yet proven to provide risk reduction or enhanced returns."