William Galvin, the Massachusetts Secretary of the Commonwealth, is investigating the sale of 25 alternative mutual funds, including those created by Wells Fargo (WFC), JPMorgan (JPM), Eaton Vance (EV), and BlackRock (BLK). The state’s securities division sent subpoenas to registered investment advisers that deal with the funds. It noted, however, that receiving a subpoena is “not an indication of wrongdoing at this time.”
A full list of the funds under investigation can be found here. Galvin’s office wants to see documents related to the recommendations the firms made make to retail investors. The Massachusetts regulator’s spokesperson, Brian McNiff, said that the funds were selected because of their size, investment strategies, and sales volumes.
Alternative funds, also called liquid alts, are often marketed as tools that involve hedge-fund-style investment strategies to mitigate risks found in bonds, stocks, and other traditional investments. Alternative funds are not like typical mutual funds. Liquid alts usually hold more investments that are non-traditional. They typically employ trading strategies that are more complex.
Alt funds may invest in global real estate, leveraged loans, commodities, unlisted securities, and start-up companies. Strategies used may include short selling, hedging and leveraging via derivatives, opportunistic tactics that change with market conditions, or even single strategy tactics. There are risks involved.
For example, greater diversification may result in flatter returns, less transparency, and an inability to adapt or reallocate to benefit overall performance. Depending on the strategy used, higher costs or substantial credit risks may be factors. A lot of alternative funds come with limited performance histories so it can be hard to know how they might perform when the market is down.
At Shepherd Smith Edwards and Kantas, LTD LLP, our alternative mutual fund fraud lawyers are here to help investors get back money they have lost because of securities fraud.
Massachusetts’ Galvin to investigate alternative fund sales by advisers, InvestmentNews, July 15, 2015
Galvin Targets Alt Mutual Fund Sales With Exam Sweep, ThinkAdvisor, july 15, 2015