Unfortunately, the lack of knowledge that ordinary investors have about the world of institutional funds is almost absolute. We refer to retail investors, of course, but also to those who have several million and are served by the most luxurious private banking departments in Spain. Both are condemned to invest in a universe of national and international funds that are authorized for sale in Spain, which leaves practically no less than 90% of existing funds around the world, as we have already explained in articles such as “Investment Funds: There are still classes”, whose reading we recommend.
As we have explained on other occasions, the most economical and viable solution for small and medium investors is to have a Luxembourg-owned vehicle. But even so, investors who do not have several million euros will find it very difficult to play in the Champions League of funds: Institutional funds and hedge funds. How are they different from the rest of the international funds? Because they lack classes suitable for smaller investors, which makes these funds a select club to which only well-informed investors have access and enough millions to exceed the minimum investment figure in these funds and also have a properly diversified portfolio .
Investment minimums in these funds range from USD 500,000 to 1, 5, 10 or even USD 25,000,000. Not to be confused with the traditional funds that have, in addition to the retail classes, institutional classes, since these would not be considered really institutional but rather retail funds with commissions reduced by volume contributed. The truly institutional funds are those that DO NOT have accessible classes with amounts that can be assumed by the ordinary investor. Some of you may wonder why a fund manager would want to avoid a retail class, thus ignoring the inflow of money from small investors.
The answer is very simple, they are usually successful funds that sooner or later will end up closing their doors even to institutional clients, because they have already reached the limit of assets under management that allows a correct execution of their different investment strategies. These successful funds and hedge funds do not need the “traffic” of small amounts going in and out of their portfolio at all, simply because they already earn enough money with their big and loyal investors.
The question that should be asked is the inverse, why a fund needs to create retail classes and accept small amounts of money, which consume time and resources and are a real administrative headache for the managers. Obviously the answer is that they would not earn enough only with their institutional investors or large investors, which leads us to the conclusion that they are not successful enough to satisfy the expectations of profitability of their investors.
Of course there are honorable exceptions of excellent funds whose managers do not renounce retail investors for a matter of principle. And despite their proven success over decades, they continue to accept small amounts of money. But it is undeniable that many other cases of tremendous success do not have that deference and decide to dispense with retail investors. It is in this Champions League of institutional funds and hedge funds that, unfortunately, access to small and medium investors is vetoed by a matter of size.
Fortunately, there are funds that “cut” those investment minimums that require institutional funds in exchange, yes, a commission on the original commission. That is, the small investor can invest in those funds of funds, which in turn invest in institutional funds with prohibitive minimums, with tickets of only 125,000, which is the minimum regulatory amount to be considered a qualified or well-informed investor. Not in all, but in some cases the potential of the underlying funds is such that it is worthwhile to pay the double commission toll. Or is it not worthwhile to invest from just 125 thousand euros in funds as inaccessible as the heirs of the famous Medallion, Bridgewater or emerging funds with alphas as spectacular as we see in the images published in this article?