By July, Americans had poured $216.47 billion into so-called alternative investments, a new generation of complex investment products that includes hedge funds and private-equity assets. That flood of money shows how popular these alternative products have become with investors; what it does not show is how risky these investments can be, and that fact concerns regulators.
“With these things, it can be like giving a 6-year-old a circular saw,” Brad Bennett, enforcement chief of the Financial Industry Regulatory Authority, told The Wall Street Journal. Most average investors “don’t understand the risks they’re taking.” Because regulators fear that buyers do not understand the costs and risks associated with the alternative products, their scrutiny of sales practices used by securities firms and the general suitability of such investments has grown, and the officials have said they are planning to file civil enforcement actions by the end of the year.
Banks were first allowed to enter alternative investments because of legislation enacted in 1999.