From: Philip DeMuth
My firm is an SEC-regulated Registered Investment Advisor in Los Angeles, California, managing about $170 million in assets on behalf of 55 clients. More to the point, I am author of Wiley's The Little Book of Alternative Investments (along with economist Ben Stein), which seeks to explain "liquid alternatives" and their use of leverage and derivatives to the general public.
In case you haven't read it, we conclude that these alternative mutual funds have an important supportive role to play in portfolio construction. They are capable of providing a true alternative to stocks and bonds, and create a third leg for the stool that supports an investor. That is not a small matter.
The benefit of using these hit home to me personally during the recent market downturn in January. When stocks were down and bonds were down, the liquid alternative funds were up. My investors were able to beat the benchmarks and did not suffer the same losses that would have afflicted them had these funds been unavailable. Liquid alternatives control risk, they do not compound it.
My concern is that the proposed regulations would effectively remove these funds from my client's quiver. Instead of making the portfolios safer, as is no doubt intended, the regulations as written actually would make them riskier -- a serious unintended consequence. The proposed rules would also result in a step backwards, making most alternative strategies once again only available to multimillionaires. But why should the SEC give rich people all the breaks? The whole point of the liquid alternative movement was to be democratic and give ordinary investors access to some of the same risk-control mechanisms used by the 1 percent.
I understand that the SEC does not want a repeat of 2008. I wish I could tell you some simple way to regulate leverage and derivatives in mutual funds. There is probably some sensitive and intelligent way to do it, but this version is not it. Please do not take away these important tools from my clients and those investors who rely upon them for risk control in their portfolios.