What Is An Alternative Mutual Fund (“Liquid Alts”) and How You Can Prepare for SEC Scrutiny

By Gigi Szekely, Director of Compliance, IMP Consulting 

Dubbed the “New, New Thing,” Alternative Mutual Funds, also known as Liquid Alts, have grown dramatically, and the SEC is paying attention.

According to a recent article in Barron’s (April 2015) – assets in this category have more than double to $449 billion, with the number of mutual funds in the group shooting up from 202 to 581. 

The growth of alternative mutual funds has drawn the attention of the SEC and its staff.  Andrew J. Bowden, Director, Office of Compliance Inspections and Examinations, has (now famously) described them as “bright and shiny objects.” This new type of fund seems to be catching the attention of investors wishing to diversify or de-risk their portfolios – and yet, Mr. Bowden also noted that they can be “sharp.”  

The sharpness that he refers to may come from the implications of marrying hedge fund strategies to a mutual fund structure.  The marriage may present high returns, but the SEC now wants a pre-nup in order to ensure that there is transparency and regulatory oversight.

As such, liquid alts have been a recent focus during regulatory examinations.  The concern being that investment managers that manage strategies generally associated with hedge funds or private funds are trying to employ the same strategies using alternative mutual funds which are subject to the restrictions pursuant to Investment Company Act of 1940.  

IMP will be speaking further on the issue at the NSCP Northeast Investment Company Compliance Forum on June 11th at the Federal Reserve Bank of Boston. If you want to catch me on the panel there for Alternative Mutual Funds (“Liquid Alts”): A New Investment for Retail Clients, you can register and receive $50 off the registration fee using the code IMP2015, or feel free to meet me after at a free FUSE reception at the Cityside Lounge on the 31st Floor from 3:30-6pm. 

The panel will include other compliance thought leaders in the industry and address additional insights on governance, sub-advisor oversight and what investment managers and funds need to be aware of based on the SEC’s examination sweep of liquid alternative funds.