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Looks like a hedge fund? SEC examining potentially riskier 'alternative' mutual funds

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WASHINGTON - Federal regulators are scrutinizing a type of mutual fund that's potentially riskier than conventional funds and is growing in popularity, prompting concerns over possible harm to ordinary investors.

The Securities and Exchange Commission has disclosed that it's conducting a "national sweep exam" of so-called alternative mutual funds, focusing in a first phase on 15 to 20 groups of funds. The SEC official who heads the agency's investment fund division says the review looks at the funds' ready assets and oversight of them by fund boards.

The regulators also are examining data on the use of riskier investment strategies by alternative funds compared with what they disclose to investors, the SEC official, Norm Champ, said in a speech in June.

The alternative funds use investment strategies similar to those employed by hedge funds, which can include commodities and complex derivatives as well as ordinary stocks.

The Financial Industry Regulatory Authority, the security industry's self-policing body, has issued an "investor alert" telling people to be aware of the characteristics and risks of alternative funds. "Alternative funds are not your typical mutual funds," the FINRA alert is titled. It warns that investors should "carefully consider not only how an (alternative) fund works, but how it might fit into their overall portfolio before investing."

The alternative funds have attracted growing interest, especially in the retail market. Alternative funds had more than $300 billion in assets as of May 31, according to Champ. Although they accounted for only 2.3 per cent of mutual funds overall as of December, investor inflows into alternative funds last year represented 32.4 per cent of the inflows for the entire mutual fund industry. That is five times more than in 2012.

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