Mutual Fund Directors Forum Issues Report on Director Oversight of Mutual Funds Focused on Non-Traditional Assets and Strategies

The Mutual Fund Directors Forum issued a report designed to provide practical guidance to mutual fund directors about overseeing “alternative funds.”  The report treats as an “alternative fund” any registered open-end fund that uses non-traditional assets or strategies to a significant degree. For this purpose, non-traditional assets include derivatives, structured securities, metals, hedge funds or commodities, while non-traditional strategies include managed volatility, risk parity, absolute return, long-short, hedged debt, market-neutral and managed futures strategies.  (The report notes that while they may face similar issues, it does not address closed-end funds.).  In broad terms, the report highlights key considerations for boards in establishing and overseeing an alternative fund, including (a) the investment and operational capabilities of the adviser, service provider expertise and resources, and the suitability of the alternative asset class/strategy for the mutual fund regulatory and tax environment; (b) for a subadviser-managed alternative fund, the subadviser’s experience in the registered fund environment, due diligence and ongoing oversight by the primary adviser, fee arrangements, and allocation of responsibility between the primary adviser and the subadviser; (c) evaluation of performance, including use of custom benchmarks and identification of appropriate peer groups, if any; and (d) prospectus disclosure.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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