Non-Publicly Offered Mutual Fund

Non-publicly offered mutual funds are investment vehicles available only to wealthy investors, largely because of their higher risks and higher potential returns. Issuers register non-publicly traded mutual funds through a private placement, not as securities.

Investors who buy non-publicly offered mutual funds must meet accredited, meaning they meet suitability requirements for income and net worth, as these funds are subject to fewer regulations than publicly offered mutual funds.

Don’t confuse non-publicly offered mutual funds with closed-end funds, which have a limited number of shares, but are available to the public at large.

Non-publicly offered mutual funds are pooled funds that employ numerous different strategies to earn active return, or alpha, for their investors. Some are aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns, either in an absolute sense or over a specified market benchmark.

Generally, all non-publicly offered mutual funds are known as hedge funds. However, there arguably is a distinction. The first hedge funds made use of hedging, in that they attempted to minimize market risk by shorting one set of stocks, while going long another set. They attempted to produce a return either similar to that of the market or above the market while taking on less risk due to the long/short model.

Today, hedge fund is a catch phrase for all non-publicly offered funds, whether or not hedging is involved. This phrase often is used to describe long-only strategies that invest in special situations or illiquid investments, carrying risk that’s not suitable for all investors. Some make use of exotic strategies, including currency trading and derivatives such as futures and options.

Only high net worth individuals are allowed to purchase non-publicly offered mutual funds, and investment managers can get in trouble for marketing to less-wealthy investors. The line of thinking is that richer investors should know the risks involved.

The most commonly quoted figure for membership in the high net worth club is $1 million in liquid financial assets. This is a threshold for many non-publicly offered mutual funds.

There are three  main drawbacks of non-publicly offered mutual funds. One is lack of liquidity. Some do not trade very often at all, since they are available only to such a small class of investors. This can make it harder to enter and exit these funds.

The second is higher fees, as well as the the tax treatment of these expenses. They are not automatically deducted from the returns realized by the investors in the same manner as publicly traded funds. Non-publicly offered mutual fund expenses appear in box 5 of Form 1099-DIV, and investors can deduct those expenses as miscellaneous investment expenses on Schedule A of the 1040.

Lastly is the level of disclosure. Some non-publicly offered mutual funds do a better job than others. But in general, investors in these funds typically receive less insight into the way these funds are managed, relative to publicly offered mutual funds.