Not Stress Tested
Risks to alternative mutual funds include patchy performance across different fund types and short track records.
Long/short equity funds, which can bet both on and against stocks, have been the most popular alternative mutual funds this year with inflows of $8.5 billion through May. The funds gained nearly 15 percent last year and are up 1.7 percent this year through May, according to Morningstar.
Managed futures funds, which mainly invest in listed or privately traded derivatives such as swaps and futures, fell 0.9 percent last year and are down 1.5 percent this year through May.
Of the 474 alternative mutual funds, 233 have been launched in the past three years, according to Morningstar. Most launched after the 2008 financial crisis, "which makes it hard to tell whether or not they will survive the next major crisis," said Michael Beriss, a private wealth advisor at Ameriprise Financial.
The U.S. Securities and Exchange Commission is examining about 25 investment firms to determine whether certain alternative mutual funds are complying with mutual fund rules on liquidity, valuation and leverage.
"The biggest risk is underperformance," said Josh Charney, alternative investments analyst at Morningstar.