Clone Fund

A clone fund is a mutual fund strategically designed to emulate the performance of a successful mutual fund.

Clone funds are developed to model the performance of larger and more successful mutual funds.

Mutual funds are created by pooling investor funds, and investing that money in a portfolio of assets. The fund manager is responsible for operating the fund, choosing which assets to buy or sell over time in order to maximize benefits for their investors. Each mutual fund is driven by a philosophy and strategy. Some aspects of these philosophies and strategies are publicly known. For instance, a particular mutual fund may aim to only focus on a specific industry sector. Another may commit to only invest in environmentally-responsible companies.

Some strategies are left to the skills and experience of the mutual fund manager, and these strategies can be a challenge to replicate.  

There are many reasons a fund or fund manager may wish to replicate another fund’s investment strategy. For instance, a mutual fund company may choose to establish clone funds when the original fund has grown too large to be efficiently managed. The mutual fund may also wish to emulate a different pricing structure within the clone fund.

The primary objective of a clone fund is to match the performance of the original fund, although actual performance can often differ due to a number of factors. Even within the same mutual fund company, the portfolio managers for the funds may differ. Myriad differences in investment style, strategy and trade execution can result in distinct differences in the performance of clone funds and the funds they emulate. 

Because the price of entry to hedge funds is too high for many investors, hedge funds become attractive candidates for cloning. Other clone funds will model themselves on the investment philosophies and strategies of highly successful investors such as Warren Buffett. Still other clone funds exist to emulate closed funds, funds that are temporarily or permanently closed to new investors.

In Canada, clone funds took on a slightly different aspect. Until 2005, when legislation changed Canadian investment rules, the term specifically referred to funds that used derivatives to bypass the foreign content restriction that governed retirement investment accounts.

Clone funds were once popular in Canada because the amount of foreign content in registered retirement savings plans was limited to 30 percent foreign content. Legislative changes in 2005 eliminated this restriction, opening Canadian investors more open access to international portfolio assets.

Prior to 2005, if a Canadian investor had already reached the 30 percent investment cap wished to invest in a the S&P 500 could get around the restriction by investing in an S&P 500 clone fund offered by a Canadian mutual fund company, which aimed to replicate the performance of the S&P 500. Since the assets consisted of Canadian derivatives, the assets were classified as Canadian property.