Somebody wake up the people at Finra… They are in the business of protecting investors, we get that. But their recent Investor Alert raises a caution flag on “Alternative Funds”, after nearly $200 Billion has already poured into the space since 2008. I guess better late than never… Their main point:
“Investors considering alternative mutual funds should be aware of their unique characteristics and risks.”
Our read between the lines translation = the alternative investments these products give you exposure to are usually reserved for only the most sophisticated of investors, and usually require dozens of pages of disclosure and explanation of the risks. We’ve sort of let a bunch of these get out there in the public without these disclosures being required – so… be careful.
Finra is essentially putting the need for increased disclosure on the investors, telling them to make sure they dig deep and find out everything they need to know, instead of putting the onus on the packagers of these products to make sure investors are given everything they need to know.
As for those of us in the futures brokerage business, we should be scared. “Wall St.”, for lack of a better term, has figured out a way to steal our business by giving the public easy access to the very same markets we specialize in and must be registered to conduct. Consider the following:
- # of pages to open an account at eTrade and invest in a managed futures mutual fund = 2
- # of pages to open an account at a futures FCM to trade a typical managed futures program = 52
Finra also doesn’t seem to get exactly what a lot of these funds are doing – saying they can’t charge 2/20 like a hedge fund. That may be true to the letter of the law, but there are plenty of players involved at the sub manager level of these products collecting their 2/20 just fine; through offshore management companies, swaps, and more. See here.
Finra’s closing line is perhaps their smartest:
“There may be other investment options to alt mutual funds that that are less complicated and cost less, but still help you accomplish your financial objectives.”
We couldn’t agree more. Managed futures can be less complicated (aside from the paperwork) and costly when accessing via managed accounts or private placements.
PS – FINRA is making headlines for other reasons as well. Strangely, FINRA’s Southern Regional Director, Mitchell Atkins is resigning after accusations from an ex-broker claiming Atkins used bingo earnings for non-charitable purposes more than 20 years ago. Bingo earnings – really?