Bloomberg: SEC to test hedge funds on leverage and liquidity

Alternative Funds to Get SEC Test for Leverage, Liquidity

Alternative mutual funds will be examined by the U.S. Securities and Exchange Commission to assess whether managers are complying with leverage and liquidity rules.

The SEC plans to test around 25 of the funds over the next several months, Jane Jarcho, national associate director of the investment company examination program at the agency, said in an interview.

The exams will shed light on how funds are trying to generate yield and how much risk they are taking, 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,” 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 may 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 percent to $285 billion at the end of March from a year earlier, according to Morningstar Inc. Three-fourths of the 80 non-traditional bond funds and more than half of 435 other alternative funds were created since 2008, the research firm’s data show.

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