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FINRA Urges Awareness of Alternative Funds

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.

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  • Report this Comment On June 12, 2013, at 12:35 PM, mikedever wrote:

    There's no question that many of the newer mutual funds, designed to provide returns that are uncorrelated with stocks, are risky. But in most case they are still LESS risky than equity mutual funds (measured both by volatility and maximum drawdown). Some of the new funds, such as long-only commodity funds, are extremely risky.Unfortunately, as these are among the simplest funds, and people and their financial advisers often equate complexity with risk and simplicity with safety, they became among the most popular. In contrast, some of the more complex strategies, incorporating multiple return drivers, exhibit less risk, especially when compared to a long-only equity fund.

    I discuss various investment myths associated with risk throughout my best-selling book, and am pleased to provide complimentary links to three of the chapters here:

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