The Securities and Exchange Commission has begun an extensive investigation into alternative mutual funds, a controversial investment product offered to ordinary investors that has gained popularity recently, raising concern over their potential harm, people familiar with the matter told The Wall Street Journal.
The SEC said that its first phase of the investigation will focus on 15 to 20 groups of funds, the Associated Press reports. The regulator’s “national sweep exam” will probe not only big investment firms like BlackRock Inc., but also small ones that only recently started to offer alternative mutual funds, people told The Wall Street Journal.
Alternative mutual funds engage in investment tactics like those used by hedge funds, which include commodities, complex derivatives, trading futures contracts, and betting stocks against others. As part of its evaluation, the SEC wants to collect information about these funds, according to The Wall Street Journal.
Investors have turned to alternative mutual funds more frequently recently. Despite the fact that they only accounted for 2.3 percent of mutual funds overall as of December, 32.4 percent of investor inflows were to alternative funds last year, which is five times more than in 2012. Money in alternative funds jumped 63 percent last year, from $158 billion to $258 billion, as several new funds opened, the SEC reports. This year, as of July, investors put $16.8 billion into alternative funds, according to The Wall Street Journal.
Jane Jarcho, head of the SEC’s investment company and adviser exams, said that the agency hopes to finish investigating 30 firms that offer alternative funds by April. The outcome of those investigations will help the SEC decide whether or not it will move forward with more examinations. Jarcho confirmed the agency’s probe into such funds to The Wall Street Journal, but would not provide further details.
The SEC has previously hinted to such investigations. In March, Andrew Bowden, director of the SEC’s office of compliance inspections and examinations, said that the regulator would focus on alternative funds.
“The use of hard to value and/or illiquid securities in an open-end mutual fund, which requires daily valuation and offers daily liquidity, is fraught with risk,” Bowden said, as cited in a transcript by The Wall Street Journal.