What is an Alternative Mutual Fund (AMF)?

The term “liquid alternative strategies” can apply to a number of different strategies and instruments. For Balter Liquid Alternative’s (BLA) purposes, we view the term as referring to Alternative Mutual Funds.

What exactly is an Alternative Mutual Fund (AMF)? An AMF is a registered mutual fund overseen by the Investment Company Act of 1940 where the investment manager utilizes investment strategies typically seen in alternative vehicles. These strategies may include, but are not limited to, shorting securities, holding concentrated positions, buying and selling options, pairs trading and hedging portfolio risk using market indices. We have seen significant recent growth in AMFs as hedge fund managers recognize the need to offer more flexible vehicles. BLA expects the trend to continue for the foreseeable future as investors become more educated on the opportunity set.

At BLA we look to include both AMFs and traditional hedge funds within our client portfolios. BLA’s Alternative Mutual Fund research process is conducted in a similar manner to our traditional hedge fund research process. In most cases, AMFs are used in conjunction with hedge fund investments. We recognize that there are pros and cons to traditional hedge fund structures and in our view AMF usage can address many of the issues present in hedge fund investing1. Many investors may be reluctant to lock-up capital while others may balk at hedge fund fee structures, or both.

Potential Key Structural Benefits of Alternative Mutual Funds:

  • Regulatory Oversight – AMFs are not private investment pools and are regulated by the Investment Company Act of 1940.
  • Liquidity – Investors can access their capital on a daily basis.
  • Tax Simplicity – Investors get a 1099 instead of a K-1, reducing complexity and time to file.
  • Transparency – AMFs must report all holdings, both long and short, on a quarterly basis.
  • Fees – AMFs do not charge performance fees.

Any tax or legal information provided isn’t an exhaustive interpretation of some of the current income tax regulations. Investors must consult their tax advisor or legal counsel for advice and information concerning their particular situation. Neither the Fund nor any of its representatives may give legal or tax advice.

1 Hedge Fund structures versus ’40 Act structures ‘40 Act Funds (also referred to as Alternative Mutual Funds or “AMFs”) are mutual fund structures defined by the Investment Company Act of 1940 that may employ alternative investment strategies. The key differences of AMFs compared to traditional hedge fund structures:

Traditional Hedge Fund

  • * Quarterly redemptions typical
  • * Short positions not typically disclosed
  • * Typical performance fee of 20%
  • * High minimum investment of > $1,000,000
  • * Unlimited leverage
  • * Tax Reporting – K1

Alternative Mutual Fund

  • * Daily liquidity
  • * Quarterly full holdings transparency
  • * No performance fees*
  • * Lower minimum investment
  • * Leverage restricted to 250% gross exposure
  • * Tax Reporting – 1099

* While mutual funds do not have performance fees they do have expenses which apply.

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