Commingled Fund

Commingled funds are investment vehicles created by investors’ money, so instead of individualized investments made on an investor’s behalf, commingled funds are collections of many investors’ pooled money.

Commingled fund managers invest this pooled capital in stocks, bonds, mutual funds and other assets based on certain rules set out in the commingled fund’s prospectus.

Commingled Funds vs Mutual Funds

Commingled funds are similar to mutual funds in that they both pool together money from different investors. But each commingled fund is specific to a single, co-advised investment strategy — so they don’t all invest in the same types of securities as mutual funds do.

Some common types of commingled funds include: 

Hedge Funds

Private investment vehicles that use non-traditional investment strategies to maximize returns. The most famous of these is the “hedge” funds — funds whose managers look for ways to make money in any market, with only their skill as an edge against other investors.

Hedge fund managers are usually paid under a revenue-sharing agreement, where they receive a percentage of any profits they make (usually 20%) and keep the rest for themselves.

Hedge fund managers usually set up their own funds, rather than running commingled funds — but some do both.

Collateralized Debt Obligation (CDO) Funds

These are types of commingled funds that invest in structured financial products like collateralized debt obligations (CDOs) and mortgage-backed securities (MBSs).

CDO funds can make money when the underlying assets they buy perform well, but they also generally hold insurance contracts to protect against losses.

Retail Commingled Funds

These are mutual fund offerings that pool together investors’ money in order to buy assets like stocks, bonds, mutual funds, and other securities along with the commingled fund.

Retail commingled funds typically feature lower minimum investment amounts than hedge funds or CDO funds.

Common Trust Funds

These are trusts that act as holding companies for pooled investments of an individual’s money — usually through a financial institution like a bank.

Some common trust funds are eligible to offer investors tax-deferred treatment, where investment gains aren’t taxed until cash is withdrawn from the fund.

Why Do People Use Commingled Funds?

While commingled funds may sound like a complicated investment, they are sometimes easier to manage for average people than other options.

They take up less time and effort than creating one’s own portfolio of individual stocks, bonds, or mutual funds, which requires financial research and constant monitoring to keep the portfolio balanced.

Some financial advisors believe that commingled funds can offer a better return than an individual investor could achieve on his own, even if he spent a great deal of time researching investment options — because there are so many people investing in commingled funds, which allow for larger investment amounts than one person could afford on his own.

Other people invest in commingled funds to become involved in an investment that requires a high minimum initial investment amount — like hedge funded or private equity mutual funds — but aren’t able or willing to put up the cash themselves.

Benefits of Investing in Commingled Funds 

Commingled funds can offer investors several advantages:

Benefits_of_Investing_in_Commingled_Funds_

Potential for High Returns

By pooling together money from many investors, commingled fund managers can invest in larger amounts of securities than they could on their own.

This greater investment size allows them to take advantage of economies of scale, which allow the fund manager to buy more of the security than he could on his own.

Commingled funds are capable of earning higher returns than mutual funds that invest in similar securities because commingled fund managers can take advantage of different types of securities to yield higher returns.

Low Barrier to Entry

The average investor would have a hard time buying enough shares of certain securities on his own — like real estate investment trusts (REITs) or small-company stocks — to make them worthwhile.

But some commingled fund offerings allow investors to participate in these investments with only a few thousand dollars.

Commingled funds can help investors enter into emerging markets, industries, and securities they otherwise couldn’t access without investing hundreds of thousands of dollars.

Low Investment Costs

Investing in commingled funds may be less expensive than investing directly in a specific stock or group of stocks because the fund manager can spread out his costs over a larger number of investors instead of simply for one person.

Drawbacks of Investing in Commingled Funds  

Commingled funds can have some drawbacks, too. These include:

Potential for Lower Returns

Because commingled fund managers invest in many different securities, the fund’s overall performance is more sensitive to changes in any one security.

For example, if a stock called up 30% of the portfolio and that stock fell in value, so would the commingled fund — even if other securities in the portfolio didn’t decline.

In addition, because commingled funds have been around for so long, they tend to have lower growth potential than newer hedge funds or CDO funds, which can offer higher returns due to their novelty and success.

Lack of Control

Investors in commingled funds may not have control over how the fund’s assets are managed because they lack the resources of a large investment firm.

In addition, investors don’t get to choose which securities or industries to invest in — this is part of the fund manager’s job, and he will likely select investments that provide him with the highest returns and most diversification in his line of work.

Importance of Disclosures 

Investors who want to invest in commingled funds can learn more about them by reading what’s called a “prospectus,” which discloses the fund’s management, how it will be managed, its risks, and all other pertinent information about the fund.

Prospectuses are issued by organizations that want to sell shares of their commingled funds to attract investors — because they know that without prospective buyers, the money will never materialize and can’t be invested in order to earn returns.

The Bottom Line  

Commingled funds are a form of investment vehicle that allows individual investors to pool their money with other investors to buy securities in large amounts.

These larger investments can be useful for earning higher returns or investing in smaller securities. But commingled funds do have drawbacks, including lack of control over asset allocation and potential for lower returns due to the fund’s volatility.

Investors who want to invest in these vehicles should make sure they understand the nature of the product they’re buying, including its risks and rewards, through reading a prospectus.

Some commingled funds use a common investment vehicle known as an "open-ended fund," which allows investors to buy and sell shares daily. Other commingled funds, such as separately managed accounts, allow investors to put large sums of money into specific investments that earn the highest returns, but the investor can't cash out easily.
Commingled funds are not the same as mutual funds, which are typically structured as a corporation or partnership that is owned by investors who pool their money to buy securities with the expectation of capital appreciation. Commingled funds can be organized as an LLC, professional corporation or partnership. They can be licensed by broker-dealers under the Securities Exchange Act of 1934. Some commingled fund managers are also registered investment advisors (RIA) and follow a fiduciary standard of care.
No, not all commingled funds invest in hedge funds. Some are structured as open-ended funds, which means they may invest in many types of securities, including debt and equity securities. Others will invest only in hedge fund strategies.
Yes, commingled funds can be set up to invest in specific real estate, mortgages or commercial loans.
Commingled funds can have lower fees because the managers charge a percentage of assets under management rather than charging an hourly fee or using other types of fee structures that may not be related to assets under management. They also can be more liquid because they are traded as a security on the secondary market as opposed to being bought and sold as part of a mutual fund that is only regularly issued shares or redeemed shares at net asset value (NAV).
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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