Fund Structuring Options: Using Parallel Funds to Improve Capital Formation

US fund managers that seek to meet the diverse needs of investors often find themselves con­sidering the launch of more than one legal vehicle that will meet unique investor requirements, and yet function as a single investment strategy or “fund.” This is the essence of one or more parallel funds.

Side-by-Side Funds for Retail

When it comes to retail funds for individual investors, fund formation choices are limited by local regulations and customs. The Investment Company Act of 1940 introduced the proposition from its inception that only funds domiciled in a state of the United States could be marketed to the public in the United States.

The rest of the world has taken note, and has (except within the European Union) essentially adopted similar regulatory propositions exclud­ing marketing of extra-territorial retail funds. For example, the European Union excludes, in principle, marketing of retail funds that are not organized in a member state. Coupled with tax policy that favors domestic “regulated investment companies” in the United States and European Union “undertakings for collective investment in transferable securities” (UCITS) domiciled in individual member states of the European Union, as prominent examples, US fund managers of retail funds are compelled to adopt “side-by-side” funds when marketing their strategies globally. For European strategies, an entire indus­try stands ready in Luxembourg to host US fund managers’ retail investment strategies on UCITS platforms. That said, this article will focus on some structures allowing US managers to target profes­sional investors globally.