SEC Takes Aim at Hedged Mutual

Funds Leverage, Liquidity

By Alan Katz - April 23, 2014
Alternative mutual funds will be examined by the Securities and Exchange Commission
to assess whether managers are complying with leverage and liquidity rules.
The SEC plans to test about 25 of the funds over the next several months, said Jane
Jarcho, national associate director of the investment company examination program at
the agency, in an interview.
The exams will shed light on how funds are trying to generate yield and how much risk
they are taking, Ms. Jarcho said. The SEC will seek to determine whether boards are
engaged in appropriate oversight, she said.
A lot of the managers brought in to run these funds come from the hedge fund world
where they weren't used to these regulations, Ms. Jarcho said. Some boards of mutual
funds don't have a lot of experience with alternative investment strategies.
Alternative mutual funds typically invest beyond traditional stocks and bonds into asset
classes like real estate and commodities, or might employ hedging techniques like short
selling. They've jumped in popularity since the 2008 financial crisis as investors seek
better returns.
The funds are among the fastest-growing segments of the $15 trillion industry. Assets in
the funds rose 52% to $285 billion at the end of March from a year earlier, according to
Morningstar.
The SEC will look at four types of alternative mutual funds, Ms. Jarcho said: Non-
traditional bond funds, which make up about half of the total assets in the segment;
long/short equity funds; multi-alternative funds and market-neutral funds.
The SEC's exams will run for about six months, Ms. Jarcho said. A second round of
examinations could be needed, she said.

http://www.bloomberg.com/news/2014-04-23/alternative-funds-to-get-sec-test-for-
leverage-liquidity.html