FINRA has issued an investor alert warning investors about alternative mutual funds.  FINRA defines alternative mutual funds as any registered fund with a non-traditional investment or trading strategy including fund-of-funds, hedging, derivatives, long/short, opportunistic, and absolute return.  FINRA warns that alt funds may be less transparent, carry additional risk, impose higher fees, utilize inexperienced managers, and have limited performance histories.  FINRA states, “There may be other investment options to alt mutual funds that are less complicated and cost less, but still help you accomplish your financial objectives.”  FINRA does acknowledge that such funds are more regulated than traditional hedge funds, thereby offering more liquidity, reduced leverage, more diversification, and daily pricing.  

OUR TAKE: FINRA is painting with a pretty wide brush. We don’t see the commonality between an absolute return fund-of-funds and a single strategy derivatives product.  Also, when FINRA looks at risk, it ignores factors such as volatility and various other risk measures utilized by investment professionals.