WSJ: Investors Flock to Alternative Funds; Regulators Worry

Sunday, 18 Aug 2013 04:27 PM

By Dan Weil

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Investors are heading in droves to alternative investment funds, such as those that go both long and short stocks, making regulators worried about the risks.

Alternative mutual funds have seen a huge inflow of $59 billion in the first seven months of the year, according to Morningstar, The Wall Street Journal reports.

That's already higher than any other full year and makes alternative funds the fastest growing segment of the mutual fund market.

Alternative funds, which often include derivatives and leverage to juice returns, are popular among investors searching for yield in a low-interest rate environment, according to The Journal.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

Some also see them as providing opportunities to make money in any market environment and as providing diversification.

"With these things, it can be like giving a six-year-old a circular saw," Brad Bennett, enforcement chief of the Financial Industry Regulation Authority, told The Journal. Most small investors "don't understand the risks they're taking."

The fact that hedge funds can now advertise has raised the hackles of some regulators. "Our concern is there's a different atmosphere now," William Galvin, Massachusetts' Secretary of the Commonwealth, told The Journal. "These firms are using more aggressive sales tactics."

One alternative investment that some experts recommend now is emerging markets stocks in the wake of their decline in recent months.

"Nobody's in emerging markets," Michael Gayed, chief investment strategist at money manager Pension Partners, told Newsmax TV. "Yet the law of one price says that because equities have risen so much in the U.S., there's no way that emerging market equities can't then also re-price upward."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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