SEC threatens survival of alternative mutual funds

Rick Steves

Hedge funds have been having a hard time since 2015, with markets putting a stop to their bullish trends from as far back as 2009, drowning market driven returns (beta) and lowering expected returns for diversified portfolios. Cloud-based institutional and hedge fund investment research provider eVestment reported recently that hedge fund volume had declined by […]

SEC threatens survival of alternative mutual funds

Hedge funds have been having a hard time since 2015, with markets putting a stop to their bullish trends from as far back as 2009, drowning market driven returns (beta) and lowering expected returns for diversified portfolios.

Cloud-based institutional and hedge fund investment research provider eVestment reported recently that hedge fund volume had declined by 40% in 2015, and according to Hedge Fund Research, more than 600 hundred hedge funds closed in the first three quarters of 2015 as tide turned and left many sinking.

Putting things in perspective, it is important to acknowledge that given the all-time high number of hedge funds (over 10,000), the absolute number of dropouts (and entrants) is also high.

The Securities and Exchange Commission, however, is posing a new threat to a specific class of funds, the “alternative mutual funds” or “hedged mutual funds”.

This new type of mutual funds, incubated in the last few years thanks to a combination of industry shifts and regulatory changes, delivers hedge fund-like exposure in a mutual fund structure, employing leverage, derivatives, and short selling, unlike traditional “long-only” mutual funds, and gaining access to strategies including merger arbitrage, convertible arbitrage, macro trading and long/short equity.

The SEC is planning to cap funds’ exposure to derivatives at 150% of their net assets, also requiring them to hold more liquid (cash and cash equivalent) assets as a buffer against potential losses.

The SEC considers derivatives as borrowing, given the outsize bets with a small down payment allowed by and the respective fees in exchange for assuming a larger potential liability.

According to an SEC study published in December, 27% of alternative mutual funds hold derivatives “whose notional value exceeds the proposed ceiling” and 450 mutual funds would exceed the 150% threshold.

From these, 200 are bond funds that use derivatives to boost returns. The same study found that an average managed futures fund held derivatives equal to about 450% of net assets. To comply with requirements, these funds would have to sell assets or shut down their retail market operations.

These potential requirements, still under evaluation by the regulatory authorities, follow recent efforts to curb chances of repeating a financial crisis like the one in 2007-2008. Curiously, it was precisely since the Dodd-Frank Act that these alternative mutual funds found their place in the market.

Read this next

Reviews

Traders Union Experts Share The Trading Analyst Review For 2024

Navigating options trading in rapidly shifting markets poses a considerable challenge. This is where options trading alert services become invaluable. They aid traders in keeping abreast of evolving opportunities and market trends. In this assessment, Traders Union experts scrutinize The Trading Analyst alert service to ascertain its efficacy. 

Digital Assets

BlockDAG’s Presale Achieves $9.9M: Aiming For A 5000-Fold ROI As Cardano’s Price Rises And Fantom Launches Sonic

Explore Cardano’s surge, Sonic’s efficiency, and why BlockDAG’s growth makes it the top crypto choice. A deep dive into the future of blockchain investments.

Digital Assets

US, UK probe $20 billion Tether transfers tied to Russian exchange.

U.S. and UK authorities are investigating the movement of $20 billion in the USD-pegged stablecoin tether (USDT) through Moscow-based exchange Garantex.

Digital Assets

BlockDAG Presale Raises $9.9M as Batch 5 Nears Sell-Out Amid Bonk’s Fluctuating Trading Volume & Spell’s Bullish Price

Explore BONK’s trading volume, SPELL’s market shifts, and why BlockDAG’s 10,000 ROI makes it an ideal crypto for savvy investors in 2024.

Digital Assets

Bybit expands into Europe amid regulatory scrutiny

Dubai-based cryptocurrency exchange Bybit is expanding its operations in Europe after encountering regulatory challenges in Hong Kong.

Digital Assets

Cathie Wood’s sponsored Bitcoin ETF sees historic $200 million inflows

The ARK 21Shares Bitcoin ETF (ARKB), co-sponsored by Cathie Wood’s ARK Invest, registered historic inflows exceeding $200 million on Wednesday, signaling a robust appetite among investors for Bitcoin-centric investments.

Digital Assets

Sam Bankman-Fried might see his 25-year sentence halved

Sam Bankman-Fried, the founder of the failed cryptocurrency exchange FTX, was sentenced to 25 years in federal prison by a Manhattan court on Thursday. This comes after he was convicted of defrauding customers and investors, with Judge Lewis Kaplan highlighting the potential future risks posed by Bankman-Fried.

Technical Analysis

EURJPY Technical Analysis Report 28 March, 2024

EURJPY currency pair under the bearish pressure after the pair reversed down from the major resistance level 164.25, which also stopped the sharp weekly uptrend at the end of last year,

Digital Assets

BlockDAG’s Presale Hits $9.9M, MultiversX & MINA Price Predictions Show Green

Read about BlockDAG’s promising $10 prediction and insights on MultiversX Price Prediction as MINA’s potential unfolds.

<