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August 24, 2014 7:16 am
The US regulator has widened its investigation into how the alternative mutual fund industry operates as concerns build about the liquidity terms being promised to investors.
The Securities and Exchange Commission said in June that it would approach 15-20 providers of alternative mutual funds – strategies that mimic hedge funds in a retail-friendly format – to ensure they are fully compliant with the watchdog’s rules.
The investigation has now been extended to include 35-40 fund companies, focusing on the valuation of fund assets, liquidity, leverage, special investment risks and how much oversight is being provided by fund directors.
The review was triggered by a recent surge of investor interest in the so-called “liquid alternative” sector, which last year attracted $95bn of new assets, according to the regulator.
BlackRock, the world’s biggest fund house, and AQR, the hedge fund company, have reportedly been contacted as a part of the review, but both companies declined to comment.
Other large providers of alternative retail funds in the US, including Goldman Sachs, Pimco, Neuberger Berman and Mainstay Investments, declined to comment on whether they had been approached by the regulator.
The SEC declined to comment on which fund companies it has requested feedback from, although lawyers suggested the review is likely to focus on the largest providers of alternative mutual funds and recent entrants into the sector.
Douglas Dick, a partner at Dechert, the US law firm, said: “Clients who operate funds of this nature, even if they haven’t got the inspection letter, are looking at the issues the SEC has raised and are trying to anticipate them. They are certainly taking it seriously – it is a significant initiative.
“I don’t think the primary purpose of the exam is to find enforcement actions, but those can’t be ruled out.”
The SEC is not the only organisation to have expressed concern about the rapid growth of retail alternative funds. Paamco, the US fund of hedge funds company, published a paper in May criticising the “mounting hype” around the industry and the potential liquidity risks this generates.
Last year’s flows to liquid alternatives represented a third of the total new money entering the mutual fund industry and were more than five times the level of new assets recorded in 2012, according to Norm Champ, director of the SEC’s investment management division.
Paul Miller, a partner at US law firm Seward & Kissel, said there was a “heightened sensitivity” to the SEC’s investigation across the industry, particularly among private fund managers sub-advising alternative mutual funds for the first time.
State Street, the financial services company, recently predicted that assets managed by the global alternative mutual fund industry would rise 80 per cent to $725bn by 2017.
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