2
The fund
What topics are covered in this chapter?
Investing in a fund
International legal structure of funds
Common forms of funds
Understanding where the money goes
Fund performance
This chapter focuses on the particularities of the fund that is chosen
by a potential investor. The fund is ultimately the only party with
which the investor will have a contract and in this chapter I seek to
break down this relationship to explain not only its relevance but also
its limitations.
Investing in a fund
The fund is a legal entity, the main purpose of which is to allow inves-
tors to put their money into one pot that can grow under the managers
control, free of tax. The fund can be formed in various ways, being a
unit trust or a private company for example, or can use the partnership
form. It is rare for alternative strategies to be created as unit trust funds.
In effect, therefore, when you invest in most funds you are simply
becoming a shareholder and for traditional funds possibly a unit holder.
20 2
The fund
Unit trust holders tend to have more limited rights. For shareholders, on
the other hand, their shareholdings can give them rights akin to those
of any other shareholders. Note, however, that when you invest in an
offshore fund you are almost always issued with non-voting shares, thus
ending up with very few rights.
As the name indicates, a non-voting share allows you to take part in
the growth and losses of the fund’s overall capital, but not to vote
on the fund’s affairs. This is what frustrated so many investors fol-
lowing the financial crisis as some funds decided almost arbitrarily
to suspend the production of NAVs, or gated upcoming redemptions
of the funds. There was a strong sense of injustice for many inves-
tors even if these powers had been disclosed in the legal agreements
they had entered into. Investors have sought to argue since then that
those agreements were not sufficiently explained to them but that
has not won them any favours. We shall talk about the impact of
disclosures later in this book. In the meantime it is worth remember-
ing that investors were probably given a false sense of confidence by
those selling the virtues of certain funds, with few investors choosing
to verify the facts.
It is also worth mentioning at this stage that funds in European juris-
dictions, because of different company laws as well as more onerous
regulations, would not be able to exclude shareholders in the way that
some offshore funds did and thus Europe offers a form of implicit pro-
tection. This has meant that more fund business has been driven to
Europe since 2008 and I think this trend is bound to continue. The
new European laws regarding UCITS IV and the AIFMD have both
already contributed to this trend.
The fund and the manager are almost one!
Funds and managers are closely related.
The reason for this is because of the legislation that applies to funds across the
world and which is remote from the public perception that funds are independent.
In principle a fund is only a pooling vehicle. This is akin to a pot of money that
governments recognise as exempt from tax. This is advantageous as only the
ultimate gains made by investors are taxed, thus avoiding double taxation that
would otherwise impact on the growth of the investments.

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