With low interest rates hampering the returns of conventional bond funds, the new alternatives are booming in popularity, such as liquid-alternative mutual funds. Sold as portfolio diversification, these “Hedge Funds for the Masses”, bring complicated fixed-income assets within reach of the average investor, who should be frightened at how these funds perform in turbulent markets.
The SEC has taken notice. In a document spelling out its priorities for examinations of the financial industry this year, it said one focus would be the “leverage, liquidity, and valuation policies and practices” of funds holding alternative investments. The SEC pinpointed fixed-income-focused funds specifically, and said it would review whether they mislead investors about how easily the funds can sell their holdings
If market instability were to occur, fixed-income prices can rise and fall quickly. Hedge funds usually are able to ride out the bumps, due to their lockups, but these newer funds may be forced to sell their positions at inopportune moments, leading to big losses for some investors. Click here for pointers when investigating future investments into liquid-alternative funds.