Pooled Investment Vehicles
Pooled investments are a financial mechanism where multiple investors come together and assemble their money to add value. A money manager uses the combined resources to invest in stocks, businesses and other assets. Since the earliest days of human history, people have pooled their money to invest and grow an enterprise. Pooling money diversifies risk and creates a larger source of capital.
One of the earliest recorded efforts of a pooled investment was in the late 18th century in Amsterdam. Businessman Abraham van Ketwich created a trust called Eendragt Maakt Magt, which means “unity creates strength.” The region had just experienced a speculative bubble in tulips and van Ketwich wanted to pool money to reduce risk and increase the available funds. He offered securities to a limited number of investors. While the fund was not successful, it proved to be a model that other businesspeople could follow.
With pooled investments, the fund’s investors are not actively involved in managing but receive returns on their investments through dividends and other means. Often, investors pay a percentage of the returns to the firm that manages the fund.
In the United States, pooled investments started in the late 1800s but became more common in the early 20th century. The first mutual fund, which was open to investors, started in Massachusetts in 1924. MFS Investment Management family of funds is still in existence today.
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What is a privately pooled investment vehicle?
Privately pooled investment vehicles, as the name implies, are private. Investment vehicles like hedge funds and private equity are private and outside many regulations of the federal government. Historically, private pooled investment vehicles operated under a private advisor exemption of the Investment Act of 1940. That changed with the adoption of the Dodd-Frank Act. The act narrowed the exemption.
The government’s goal is to reduce conflict of interest and the potential risk to investors. In 2021, there were over 37,000 privately pooled investment vehicles, according to the SEC. They were divided between private equity funds, hedge funds, real estate funds, qualified hedge funds and others.
Generally, a private fund is only open to accredited or qualified investors. These are investors like large institutions, pension funds and high net worth individuals. The amount of money required to invest in a private pooled investment vehicle is high. An accredited investor is defined as an organization with over $5 million in assets. A qualified investor is someone who has earned income exceeding $200,000, or $300,000 when combined with a spouse, and $1 million in assets excluding a primary residence.
Privately pooled investment vehicles are generally focused on long-term investing and often place limitations on an investors’ ability to withdraw funds. That makes these funds less liquid than other types of investment vehicles.
What is the difference between a closed and open investment fund?
When talking about pooled investment vehicles, there are two different types of funds — open and closed. Each type of fund operates differently and is guided in different ways. An investor must understand the difference between the two before deciding which type of fund to invest in. Open and closed funds are very different and require scrutiny.
A closed-end fund has a fixed number of shares. Van Ketwich’s Eendragt Maakt Magt fund was a closed fund. It had several different types of investment levels and a limited number of people who could invest in the fund. Once a closed fund is full, investors are no longer able to place money in the fund directly. The only way to invest in the fund is to purchase shares from someone who is already an investor. The set price of the socks will depend on the value of the fund and the type of investment.
Closed investment funds have someone or a group of people that manage the fund. The goal is to maximize investors’ return on investment. Investors in the fund are charged a flat fee or a percentage of the amount invested. Closed funds are often listed on a stock exchange but can also be private.
Open investment fund
In contrast, an open-ended fund accepts an unlimited number of investors. Examples are mutual funds and exchange-traded funds (ETFs). Open-ended funds can be traded on an exchange or sold directly from financial firms. The funds are often an assortment of investments from stock to real estate and bonds.
Open-ended funds are usually more liquid than closed funds. Investors are free to buy and sell an open-ended fund. They are usually a low-cost way for investors to grow capital. Funds generally charge a small amount per transaction. An investor can choose from thousands of different funds and place money in a fund based on the level of risk and expected gains. Open investment fund managers generally are more conservative than closed fund managers, but that is not always the case. A person can invest in high-risk open investment funds.
Open investment funds are regulated through the Investment Company Act of 1940 and the Dodd-Frank Act of 2010. There are approximately 7,600 mutual funds in the United States. They have combined assets of over $12.8 trillion.
What are the types of pooled investment vehicles?
A mutual fund is a professionally managed fund that pools money from investors. Mutual funds often invest in stocks, bonds and other financial instruments. Mutual funds vary greatly and are designed to match an investor’s goals. Some mutual funds offer higher risk with the potential for higher returns. Others are more conservative and are geared toward less risk and lower returns.
Mutual funds are designed for individual investors. The barrier to entry is small and very little capital is required to invest in mutual funds. Mutual fund companies often charge based on transactions, but others charge commissions. Thousands of different mutual funds exist, and several large corporations are built around selling and investing in mutual funds. Return on investment is earned in a variety of ways including stock dividends, stock performance, bond rates and the sale of investments. Mutual funds are usually organized around specific sectors or industries. Investors might put money in a tech fund that holds stakes in Facebook, Google and Apple. Or a mutual fund might invest only in Fortune 50 companies.
Exchange-Traded Funds (ETFs)
Exchange-traded funds are designed to track a sector or other asset. The price of an ETF is based on the performance of that sector. An ETF can be organized around stocks, commodities or currency. They are bought and sold like a stock and utilized due to the low broker commissions.
ETFs are more liquid than mutual funds because they are bought and sold in real-time while the stock exchanges are open. The amount of money invested in ETFs over the last 20 years has grown significantly and more and more funds have been developed to track particular sectors. They can be an important tool for investors to diversify a portfolio. Exchange-traded funds are open and do not limit the number of investors.
A pension fund is a pooled fund that helps fund someone’s retirement. Pension funds are large, institutional investors and account for trillions of dollars in assets. The pension fund receives money from employees and employers and invests the money. Once a person reaches a certain age, the pension fund pays the individual a certain amount of money. There are both private sector and public sector pension funds.
In recent years, pension plans have become less favorable with U.S. employers and many now favor 401(k) contributions. Under a traditional pension plan, payout is not based on the performance of the fund. An employee is guaranteed a certain amount of money regardless of how well the fund is managed. A 401(k) plan, on the other hand, does not have a guaranteed payout.
Hedge funds are privately managed funds that are not strictly regulated by the SEC. Investors are usually high-wealth individuals and institutional investors. The funds often take risky bets to secure higher returns for investors. Those tools can include short selling, leverage, derivatives and other more risky investment strategies.
Fund managers usually charge a percentage of assets along with a performance fee based on profits. Historically, hedge funds have produced quality returns for investors, but over the last several years, performance has been equal to or less than large-cap funds. Hedge funds are often less transparent about their investment strategies than mutual funds.
Private Equity Fund
Private equity is a form of investing where money is pooled and invested in companies. Private equity firms usually target more mature industries like aerospace and retail and look to maximize the performance of older businesses, often through buying multiple businesses and introducing efficiencies. A private equity firm usually takes a controlling interest in a company and wants to become actively involved in the management and operation of the business.
Funds for private equity come from wealthy individuals and large institutions like pension funds. Private equity funds, as the name implies, tend to invest in private companies that are not listed on a stock exchange. Private equity funds usually collect management and performance fees.
Real Estate Investment Trusts
A Real Estate Investment Trust (REIT) is a pooled investment vehicle where the organization invests in real estate. REITs are often listed on a stock exchange and are an opportunity for small investors to invest in the real estate sector. REITs can invest in a variety of real estate sectors including shopping malls, warehouses and apartments.
REITs often earn money by purchasing real estate assets and collecting rent from tenants. REITs usually pay out dividends to shareholders and have historically been a good investment for small investors. Outside the 2008 real estate crash, real estate has been a positive investment vehicle for decades.
Unit Investment Trusts
Unit-Investment Trusts (UIT) are pooled investment firms that buy and hold stocks, bonds and other investments. Unlike mutual funds, Unit Investment Trusts are organized for a specific period of time and have an expiration date. They are not actively managed and are usually purchased directly from the investment firm.
Unlike mutual funds, UITs are generally closed funds. They offer a limited number of opportunities to investors. UATs allow investors to invest in a diversified portfolio for a low cost. They are often popular with the buy-and-hold investors.
What are examples of pooled investment vehicles?
Pooled investment funds come in a variety of sizes and styles. Here are a few examples:
Vanguard Total Stock Market Index Fund Admiral Shares is a mutual fund. It has over $900 million under management and has offered investors 13% annualized performance over the last three years. The fund has nearly 4,000 stocks in its portfolio and is led by Microsoft, Apple, Google and Amazon. The minimum investment is $3,000.
Real Estate Investment Trust
The Plymouth Industrial REIT specializes in distribution centers, warehouse and industrial properties in secondary markets. The company focuses on several key logistical areas including Kansas City, Indianapolis, Chicago and Cleveland, Ohio and seeks out undervalued assets.
Since it was founded, Plymouth has purchased $900 million on real estate and saw 4.7 million square feet of leases in 2021 with a 9.7% increase on rent. The company pays out quarterly dividends.
The Carlyle Group is considered one of the largest private equity firms in the country. The company has nearly 2,000 employees with offices in North America, South America, Europe, Africa, the Middle East, Asia and Australia. Based in Washington, D.C., the Carlyle Group is listed on the NASDAQ stock exchange.
The company has been involved in numerous high-profile purchases such as Hertz, Kinder Morgan, Dunkin Brands and Getty Images. The company raises funds in the early days through private investors. The company has investments in real estate and financial services as well.
Is a hedge fund a pooled investment vehicle?
Yes. A hedge fund is a pooled investment vehicle. The fund is responsible for buying and selling investments with money from investors. Money is collected from high-wealth individuals and institutional investors.
Pooled investment vehicle vs private fund: Which is better?
As an investor, there are many options within pooled investment vehicles. Whether a person wants to invest in a private vehicle or a public vehicle often depends on the investor’s access to capital. Small and non-accredited investors do not have access to private equity and hedge funds and are limited to mutual funds, ETF and other lower-entry investment vehicles.
Just because there is a low cost of entry does not mean public pooled funds are bad. These have historically been sound investments for small investors and large accredited investors can lose large sums of money from privately pooled investments. Private firms often have high-risk strategies and are highly leveraged. As well, mutual funds and other public pooled investment vehicles tend to be more liquid than private vehicles.
What is a pooled investment fund?
A pooled investment fund is exactly what the title entails. It is a fund based on a pool of money from multiple investors. The pooled funds are managed in a variety of ways to maximize the return on investment for the investor. These funds are sometimes actively managed where assets are bought and sold often but can also be passive investments where portfolios change very little over time.
Pooled investment vehicles often focus on particular strategies or sectors. A large-cap mutual fund only invests in large corporations. A Real Estate Investment Trust only invests in real estate. Pooled investment vehicles can have both low and high barriers to entry depending on the type of fund.
Is a private equity fund a pooled investment vehicle?
Yes. A private equity fund is a pooled investment vehicle. The fund collects money from multiple investors and uses that money to invest in private companies. A private equity fund, however, is not heavily regulated by the Securities and Exchange Commission.
Pooled investment vehicles have been around for centuries and are an option for investors outside of purchasing individual stocks and bonds. They can help an investor diversify a portfolio and spread risk across several different investment types. One of the main advantages to the individual investors is that pooled investment vehicles are managed by professional money managers and an investor does not have to manage the daily-to-daily operations of the investment.
Besides the strategies mentioned above, the internet has given investors another pathway to invest in pooled investment vehicles. Crowdfunding is a new and innovative way to invest in real estate.
Recent changes in government regulations allow investors to invest in crowdsourced projects. It is a great way to diversify a portfolio and invest in the types of projects normally reserved for private equity and hedge funds. Investing through crowdfunding in a real estate project requires a small amount of capital and allows investors to diversify their holdings, investing in assets previously inaccessible. Contact us to find out more about how you can invest with Rising.
Chris Rising manages the day-to-day business activities of Rising, while also serving on its Investment Committee.
He received his J.D. Law, Real Estate from Loyola Law School and his B.A. in History and Political Science from Duke University.