WASHINGTON (AP) -- The Financial Industry Regulatory Authority is urging investors to make sure they understand alterative funds before they invest in them.
The industry watchdog issued a new investor alert Tuesday that explains the unique characteristics and risks of these investments, which can carry much higher risk than some investors may realize at first glance.
Alternative or "alt" mutual funds are publicly offered, SEC-registered funds that hold more non-traditional investments and use more complex trading strategies than traditional mutual funds, according to FINRA. This may include holding assets such as global real estate, commodities, leveraged loans and unlisted securities.
That increases the risk beyond those included in the traditional bonds, stocks and cash that more traditional investment mediums hold. Alt funds may also use more complex strategies, including hedging and leveraging through derivatives and short selling.
"Investors should fully understand the strategies and risks of any alternative mutual fund they are considering," Gerri Walsh, FINRA's senior vice president for investor education said in a statement. "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."
FINRA suggests that investors look at a fund's investment structure, objective, strategy, performance history, and more when making their investing decisions.