FINRA Warns Investors to Proceed with Caution Regarding “Frontier Funds”

FINRA recently issued an Investor Alert, “Frontier Funds: Travel with Caution.” In the Alert, FINRA explains that “frontier funds” are those which invest in securities of companies in countries with developing markets, such as Argentina, Lebanon, Nigeria, Slovenia, and Vietnam. FINRA is concerned that frontier funds are piquing investor interest as a way to diversify assets beyond the established international and more developed emerging markets and with the possibility of potential gains. Investing in frontier markets, however, entails heightened risks.

Frontier economies tend to be smaller, and their markets for trading securities less developed, than emerging economies such as Brazil, Russia, India and China, according to FINRA. In addition, FINRA explains that the legal, financial accounting and regulatory infrastructure of frontier markets may be weaker or less developed, and political stability may be more of a concern than those of more established markets. Frontier markets also may have restricted cash flow, less investor participation, fewer large global companies, and limited international trade compared to established and emerging economies. Notwithstanding these drawbacks, says FINRA, frontier market countries also tend to have populations that are achieving gains in education and entrepreneurship, leading to an expanding economy and rising standard of living.

FINRA stated there are a limited number of funds whose particular focus is frontier markets, and each fund is distinct. For example, some funds invest in more than 30 different frontier markets, while others focus on frontier markets in a particular region, such as Asia, Africa, or the Middle Ease, or even a single country. Other funds focus on a single or small number of economic sectors, such as banking , energy, or agriculture, in various frontier markets. Alternatively, some funds track an index encompassing many countries that are considered to be frontier markets. In addition, some funds may include both frontier markets and larger, more developed emerging markets. Global or international funds also may have a stake in frontier markets.

All funds registered under U.S. law must provide investors with a prospectus, which includes information regarding the fund’s investment objective, major holdings or index it tracks, historical returns, and information regarding fees and risks. FINRA warns investors to read a fund prospectus carefully, evaluate the fund’s risks, and be aware that most frontier funds are intended for “aggressive growth.”

FINRA’s Alert offers the following tips to avoid problems:

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