Funds are types of collective investment scheme that pools money from many investors to purchase securities. They are often available to the public, governed by regulations and managed by investment professionals. Funds may invest in equities, bonds, cash and depending on the type of fund derivatives, commodities and property.
Structured funds share many of the characteristics of traditional funds. There are a number of differences, however, the most important is that the value of the fund or the dividend it pays is calculated in pre-defined way. That calculation is linked to the price of an asset, which may be include one or more those listed above.
For example, a structured fund may undertake to protect 80% of the investors’ capital and capture the performance of a portfolio of assets. A structured fund may hold one or more securities, funds, options, structured deposits or structured notes to deliver the pre-defined payoff.
There is sometimes a fine line between a structured fund and other types of fund that use options. One example is a hedge fund. Another example is an income fund that sells options to generate additional income. Some funds buy options to protect them against market downside. The difference is that they do not make protection an objective.
In Europe, many structured funds are Undertakings for Collective Investment in Transferable Securities (UCITS). It is a European industry standard offering greater transparency, control, governance, risk management and asset protection.
The European Securities and Markets Authority (ESMA) define structured UCITS as “UCITS that provide investors, at certain predetermined dates, with algorithm-based payoffs that are linked to the performance, or to the realisation of price changes or other conditions, of financial assets, indices, or reference portfolios.”
There are types of structured fund including those using a protected cell company, which can be more flexible and cheaper than a UCITS fund.
Funds tend to be taxable as capital gains in the same way that shares are taxed and dividends may be taxed accordingly. Investors should seek their own advice in respect of taxation etc.
In addition to the credit risk of assets within the fund and the market risk that the fund does not pay any return, there are a number of other risks associated with funds (see Risks of Structured Investing).