Publication Title

Journal of Corporation Law


alternative funds, mutual funds

Document Type



For the first time in an era, new investment products for smaller ("retail ") investors are emerging. These products are mutual funds that engage in the types of trading and investment activities that have long been the province of sophisticated investors. Accordingly, the new funds (called "alternative funds") promise to reduce the gulf between retail investors and their sophisticated counterparts, in terms of portfolio diversification and investment results.

This Article describes the complex mix of factors that spawned alternative funds and critically evaluates the funds' potential, the first scholarly work to do so. It additionally unearths the paradox that impedes the realization of that potential: although financial advisers counsel that portfolio diversification reduces investment risk, taking advantage of the opportunities that now make diversification possible could unduly increase that risk. This result, moreover, arises not from alternative funds themselves. Rather, it is a product of the fact that the primary regulatory tool for protecting investors—disclosure—is particularly ineffective in the alternative fund context. In addition, the profit-driven financial professionals that assist retail investors with their investment decisions need not, in many cases, do so in furtherance of their customers' best interests and, in any event, may not have sufficient expertise about alternative funds to be useful.

The Article contends that regulatory solutions should center not on disclosure, as the usual target of securities regulatory reform, but, rather, on the processes by which mutual fund shares are marketed and sold to investors. It proposes politically feasible reforms that would dissolve the paradox, enabling retail investors to take better advantage of the new investment universe.



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