As the number of open-end mutual funds employing hedge fund-like alternative strategies continues to increase, so too does the scrutiny of these funds by the Securities and Exchange Commission, officials from the agency said this weekend.
Andrew “Drew” Bowden, who heads the investment advisor and fund program at the SEC’s Office of Compliance Inspections and Examinations, said Saturday that funds using alternative and hedge fund investment strategies are a rising focus of the agency because they are putting more customer money into derivatives, options and other riskier assets than traditional money market funds do.
The alternative funds are expected to grow from 3 percent of mutual fund assets currently to 15 percent in 10 years.
The alternative vehicles require an extra effort by mutual fund compliance operations due to the high complexity of the investments used in these products, said Bowden and other OCIE officials who spoke at the Practising Law Institute’s two-day SEC Speaks forum in Washington, D.C.
SEC officials indicated they plan to scrutinize portfolio managers at the funds to see if they have the expertise needed to adequately run alternative investment strategies. They said they’ll look closely at valuation at the firms since some alternative investments are illiquid.
The OCIE also wants to look at the discipline of the alternative funds for daily liquidity and daily evaluation.
In addition, the agency said it's keeping a closer eye on exchange-traded funds and variable annuities that employ alternative strategies.