SEC warns on hedged mutual funds

Andrew Bowden
Source: SEC | Flickr

A top financial regulator has issued a warning about the rapidly growing segment of mutual funds that mimic more complicated hedge fund strategies.

"Alternative funds are the bright, shiny object. But they're a sharp object," Andrew Bowden, director of the Securities and Exchange Commission's Office of Compliance Inspections and Examinations, said during a speech at an investment advisor conference Thursday.

"The use of market valuation for illiquid securities in an open-ended mutual fund, which requires daily valuation and offers daily liquidity is fraught with risk," Bowden said. "If any of you are considering launching a mutual fund that uses alternative investments or strategies, I implore you to evaluate the reasonableness and the effectiveness of your controls."