Buyer beware! FINRA issued an investor alertregarding the burgeoning alternative mutual fund asset class.
According to FINRA, in addition to the usual market and investment specific risks mutual funds have, alternative mutual funds carry additional risks from the strategies they use. For example, market-neutral funds tend to have significant portfolio turnover risk that can result in higher costs. Similarly, a distressed bond fund is likely to have significant credit risk.
Also, alternative mutual funds can be pricey versus their traditional mutual fund peers, sporting annual operating expenses well north of 150 basis points.
As well, many alternative funds have limited performance histories dating back to post- 2008, so it is not known how they will perform in a down market.
"Investors should fully understand the strategies and risks of any alternative mutual fund they are considering, stated Gerri Walsh, FINRA's Senior Vice President for Investor Education.
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."