Umbrella background


An umbrella fund, also known as a compartment fund, is a collective investment vehicle made up of a family of funds. Each sub-fund is independent from the rest, despite sharing certain conditions such as the contract constitutive or management regulations.

In reality, umbrella funds take the form of a single investment fund. With the particularity that it is in turn divided into several sub-funds. Each compartment or sub-fund may have its own units, its own investment policy, its own net asset value, a differentiated portfolio of assets, characteristic fees and a different name than the umbrella fund.

This has several implications. For example, one of the sub-funds or compartments can be dissolved without affecting the umbrella fund. That is, in the previous image if compartment 3 disappears, it would not affect compartments 1 and 2. Everything would remain the same. With the exception that the umbrella fund would be made up of 2 compartments and not three.

Purpose of umbrella funds

The funds by compartments are constituted as such for fiscal and administrative reasons. In addition, there is a central fund that carries out collective advertising work. More specifically, we can establish that they aim to:

  • Reducing the number of funds.
  • Simplify administration and management tasks.
  • Reduce management costs.
  • And, derived from the above, reduce costs for shareholders.
  • Offer products that are better adapted to the expectations of the participants.

Fund characteristics by compartments

Below we explain what are the main characteristics of compartment funds:

  • Each of the sub-funds has independent investment strategies, therefore each has a specific portfolio.
  • The fees may be the same or different between the established compartments.
  • The returns between the sub-funds are independent and can be completely opposite.
  • The risks assumed will depend on the compartment chosen. An equity sub-fund will have higher risk than a fixed-income one.
  • The main fund will have an explanatory prospectus and each sub-fund will present a prospectus containing its conditions, objectives, risks, etc.
  • The costs of the fund are divided between the different compartments, it is one of the benefits of investing in this type of fund.
  • The fund can be marketed through different channels, it is possible as each sub-fund can be targeted for an independent investor profile.

Difference Between Umbrella Funds, Fund of Funds, and Master / Subordinate Funds

The funds of funds have a purely contractual relationship with the other funds. That is, they invest in other funds and cannot influence them. However, in umbrella funds it happens that the compartments control the central fund.

Likewise, the structure of an umbrella fund is also different from that of a parent / subordinate fund. In other words, a principal / subordinate fund acts inversely to a fund of funds. Instead of going from one fund to several funds (fund of funds), the flow of money goes from several funds (subordinates) to a central fund (principal). Where appropriate, the umbrella bottom feeds the compartments through a central bottom.

Umbrella funds in the case of hedge funds

In the case of hedge funds, funds by compartments are established through an agreement. These are typically hedge funds that carry out the same very similar strategies and management styles. The agreement they reach aims to:

  • Offer a similar product but managed in different countries or with a different currency.
  • Offer said product, but through securitized shares. For example, shares for a limited time or shares with a payable dividend.
  • Operate in a coordinated manner. That is, act as a cartel to ensure that their strategies generate profitability.

A peculiar case to refer to this last point was in 1997. The devaluation of the Thai bath (Thai currency) was attributed to the large short positions of various hedge funds. So much so, that the International Monetary Fund (IMF) opened an investigation into it.

In conclusion, a fund by compartments is made up of different sub-funds with totally different characteristics. The investment strategies followed are independent between each compartment and, therefore, the returns obtained as well.

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