Alternative Mutual Funds: An Initial Approach to Analyzing the Impact of Regulation on Fund Performance

Abstract

This study seeks to examine the performance differences between regulated and unregulated investment funds. The funds studied are called alternative mutual funds by federal regulators, and are different than traditional mutual funds. Sponsors of these alternative mutual funds have increased their offerings to the investing public which has attracted regulators’ attention. Regulators are assessing whether the current regulatory framework is sufficient for protecting investors. The objective of this empirical analysis is to determine the effect of regulations on the performance of these alternative mutual funds relative to unregulated funds of similar character. This type of study is a first step in examining the possible cost of operational regulation on investment fund performance. This thesis begins with a history of investment fund regulation in the United States. The discussion moves to a review of the theoretical underpinnings of financial regulation for investment funds. After establishing the historical environment for the regulation, the report moves to an explanation of alternative investment strategies and follows with a description of their significant growth. The report summarizes the results of the empirical tests, and concludes with suggestions for future policymaker inquiry. While the limitations of the data set constrict the explanatory power of this study, the results are indicative of the potential impact that regulations can have on the benefits that alternative mutual funds provide to investors. The SEC may be well advised to execute a large-scale analysis on the effect of the operational restrictions on alternative mutual funds versus comparable unregulated private funds. Insights gained might guide improvements in the regulatory structure for this growing sector.