How to Launch a Customizable Fund: A Comprehensive Guide

In the ever-evolving world of investment, adaptability and innovation are key to success. 

Traditional investment models can often be restrictive and expensive, making it challenging for both fund managers and investors to navigate the ever-changing landscape. 

If you're looking for a way to scale your investment efforts while retaining flexibility, customizable investment funds (also known as Investor Choice Funds or Flex Funds) could be the solution you've been searching for.

What is a Customizable Fund?

A customizable fund combines the best aspects of deal-by-deal investments with the convenience of traditional funds, creating a versatile option for both fund managers and investors. 

With this approach, you can pool all your investments into a single fund, eliminating the need for separate filings for each investment opportunity (and importantly let investors receive a single K1 with their share of the gains and losses at the end of the year).  

What sets this model apart is the ability to include various asset classes and business models within the same fund, which results in cost savings for fund managers and appeals to investors who prefer to make investments on a case-by-case basis, with more control over their capital.

Understanding Customizable Single-Fund vs Flex Funds

Single-Fund Structure

The single-fund model is a conventional approach and in this model, assets and investors are commingled within a single fund, and complex accounting mechanisms are employed to adjust the capital accounts of each investor as they make investments. 

While this approach has been effective for many, it comes with certain drawbacks:

• Complex Accounting: The model requires intricate accounting mechanisms to track and allocate income, losses, and expenses to individual investors. This complexity can lead to higher administrative costs, which are often passed on to investors.
• Fund Administration Costs: The need for specialized and costly fund administration is inherent in the model. The complexity of managing individual investor capital accounts necessitates a dedicated administrative team.
• Pooling of Assets: In the model, all assets are pooled together, potentially exposing investors to greater risk as the performance of one investment can affect the overall fund.

The Flex Fund Structure

In contrast to the above model, a "Flex Fund" structure takes a unique and innovative approach to fund management. 

Under this model, each investment opportunity is treated as its own separate fund, referred to as a sub-fund. These sub-funds are created with distinct share classes, each with its own set of rights, distribution mechanisms, and sub-classes. 

Here's how the Customizable Flex Fund structure differs:

• Individualized Sub-Funds: Each investment opportunity is regarded as a standalone fund with its own set of share classes. This individualization allows for greater customization, as each sub-fund can have its own specific investment strategy and goals.
• Simplified Accounting: Allocation and accounting are done at the Special Purpose Vehicle (SPV) level corresponding to each share class. This simplifies the accounting process and reduces the need for complex fund administration.
• Asset and Liability Separation: Importantly, assets and liabilities of each share class are legally separated by contract from all other classes. This separation provides added liability protection and ensures that the performance or issues of one sub-fund do not impact others.
• Flexibility for Fund Managers: The Flex Fund structure offers fund managers the flexibility to adapt and customize each sub-fund without the burden of intricate accounting procedures, making it an attractive option for those seeking to tailor their investment offerings.
• Cost Efficiency: Reduced administrative complexity often translates to lower fund administration costs, potentially leading to more competitive pricing for investors.

In practice, the choice between the customizable single-fund model and the Flex Fund structure depends on the specific goals, strategies, and preferences of fund managers and investors. 

Understanding these fundamental differences in fund structures is crucial when embarking on the journey to launch a customizable fund which we’ll cover next.

How to Launch a Customizable Fund

Once you’ve locked down the structure, the next step is launching a customizable fund. 

This doesn't have to be complex or costly. Here's a step-by-step guide to help you get started:

1. Setting Up Your Fund

You should collaborate with legal experts, accountants, and financial institutions who offer cost-effective services to help you establish your fund. 

From finding legal counsel to creating a legal entity and completing any necessary regulatory filings, you can streamline this process with professional support.

2. Adding Your First Investment

Once your fund is in place, you can start adding investments. Ensure that you have a user-friendly platform allows you to create investments, upload relevant documents, and let your investors make decisions on a deal-by-deal basis. 

You have the flexibility to invest as a general partner (GP), co-GP, limited partner (LP), or joint venture (JV). You can also set distinct minimum investment thresholds for each investment and select from various investment structures and compensation models.

3. Onboarding Investors

Investor management is made more straightforward with support for Know Your Customer (KYC), accreditation, and Anti-Money Laundering (AML) compliance during the onboarding process. 

An intuitive investor platform makes it easy for your investors to access information about available investment opportunities and construct customized portfolios.

4. Adding New Investments Over Time

Unlike traditional funds that have fixed start and end dates, a customizable fund offers the freedom to add new investments at any time, without any predetermined expiration date. 

This flexibility distinguishes it from traditional investment models, reducing costs and enabling you to create new investment opportunities whenever the need arises.

Conclusion

In conclusion, customizable investment funds offer an innovative approach that combines flexibility with accessibility, providing a world of new investment opportunities. 

Whether you're a seasoned investor or just starting out, the customizable fund model allows you to adapt to the changing investment landscape efficiently and effectively.