As these funds are set up as companies under company law there is no trust to manage. The assets of the fund are owned by the investment company and the investors own shares in the company that give them various rights to participate similar to shareholders in any company.
Responsibility for the performance of the company lie with the board of directors. The depository will monitor the investment company, just like the trustee in a unit trust.
Unit trusts and investment funds are collective investment schemes whereby investors' money is pooled and managed as one amount by the investment/fund manager with each investor having a share in the assets in the portfolio.
Funds that are authorized by the regulator can be sold to the general public; those that are not authorized can be sold only to certain types of investor, usually the ones that can prove either market knowledge and expertise or certain levels of wealth or both.
Authorized funds must comply not only with the trust deed if there is one but also with the terms given in the prospectus and the prospectus must be available to the investor before they purchase shares or units.
Funds are established in either onshore or offshore jurisdictions. The main reason for this is the tax and regulatory environment and the target investor base. Offshore funds are neither "tax free" nor "unregulated". However, the rate of tax applied to the funds' activities may be more attractive in an offshore locality and likewise there may be a less onerous regulatory environment applying to the activities of the fund. Therefore, offshore funds are often "unauthorized" for sale to the general public and can only be sold to what is often referred to as "qualifying investors".
Offshore locations where funds are registered include:
- Jersey
- Guernsey
- Isle of Man
- Bermuda
- Cayman
- Bahamas
- British Virgin Isles
Funds are established with investment objectives in mind.
This is reflected in the title of funds, for example UK Small Caps would indicate that the fund invests in small capitalized UK-based companies. A Global Income Fund would suggest that the fund invests in assets that will generate income, dividends, interest, etc. Some funds are mixed so that they are designed to deliver both capital growth and income.
The manager therefore has the guideline for what the fund is investing in, however there are further guidelines and objectives. The fund will have a target for the return it will deliver to the investor. Often this is in simplistic terms a percentage return; for instance a fund may have a target of growth or income return of 10% per annum. This is sometimes set against a benchmark so, for instance, the fund might be expected to return X% more than an index such as the FTSE 100 or the S&P 500.
Fund managers may also operate within a benchmark allocation of what is called 'asset classes and targets'.
For example:
Asset Class Asset Allocation Benchmark
Equities 60% FT All share
Bonds 30% FT Gilt index
Cash 10% Merrill Lynch Index
The above portfolio, the asset allocation split across equities, bonds and cash. If the fund has received a subscription of say USD100,000 the manager will invest USD60,000 in acceptable equities, USD30,000 in acceptable bonds and USD10,000 in acceptable cash instruments. The selection of the actual instruments and securities is down to the manager and the target is to at least equal the indices shown.
Markets and Investments
Fund managers must have somewhere to invest the money contributed to the fund by the investors. In most cases the money is invested through the capital markets in either the purchase of equity (shares) in companies listed on stock exchanges or new issues (public offerings) of shares on stock exchanges, debt instruments like fixed income bonds, floating rate notes, etc. issued by governments, companies and other government agencies or local authorities like local or county councils, etc. and in cash or what is called "near cash" instruments like treasury bills.
The precise instruments that are used depend on the types of fund and what it is permitted to use. For example any fund allowed to invest in government bonds could invest in the bonds issued by the governments of the G7 countries like US, UK, France, Germany, Japan, etc. However retail funds may be restricted and not permitted to take the risk of investing in the bonds of emerging markets although the income return is higher there is a greater risk of the fund losing its money if the issuer defaults on a payment or redemption of the bond.
Likewise a hedge fund which can assume far greater risk than an authorized unit trust can "gear" or "leverage" the portfolio's exposure by using products like derivatives where they can acquire a much greater exposure for the money invested than a unit trust can by investing the same amount in shares.
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