By Gregory Meyer in New York
Published: July 8 2010 19:43 | Last updated: July 8 2010 19:43
A US regulator is seeking to extend its reach to cover mutual funds sold to retail investors which operate an arcane hedge fund trading strategy called managed futures.

The National Futures Association, an industry-funded watchdog for futures investors, wants to re-assert oversight of mutual funds that primarily trade futures contracts, leveraged derivatives whose value is linked to the future value of markets from commodities to interest rates. The association had these powers until 2003.

US sale talk keeps National Grid static amid general rise – Jul-08

UK regulator reform still mainly a blank page – Jul-04

Spotlight on CEO and board hiring – Jul-04

Managers on alert to comply or explain – Jul-04

Fund managers told to embrace new rules – Jul-04

Pan-Euro regulatory body is imminent – Jul-04

The proposal comes as small investors see a proliferation of mutual funds specialising in futures as a means of diversifying from equities or bonds or betting on a long-term rise in commodity prices. AQR, the quantitative fund manager, and JPMorgan are among the companies whose mutual funds are targeted in the NFA proposal.

The NFA last week quietly petitioned the US Commodity Futures Trading Commission to require futures-oriented mutual funds to register with the association, forcing more disclosure to investors and potentially adding costs as these funds compete with higher-fee hedge funds.

“These mutual funds are marketed and sold to customers, including retail investors, who may be unsophisticated in commodity futures investments,” the petition said. “NFA believes that any commodity futures investment that is marketed to retail customers” should be overseen by futures market regulators. US mutual funds are already regulated by the Securities and Exchange Commission.

The proposal, if approved by the CFTC, could mean new rules for scores of mutual funds with billions of dollars under management, said Bob Enck, chief executive of Equinox Fund Management, which runs a fund identified in the petition. The CFTC said it did not have a timeline for action.

“The funds would be saddled with an entirely separate scheme of rules and regulations – this at a time of a deep recession when existing resources are being stretched,” said Matthew Kerfoot at Dechert, a law firm. “I would expect the proposal to be strongly resisted by the industry.”

The Investment Company Institute, a mutual fund group, said it was still reviewing the petition.