Bespoke investment funds offer benefits in diversification, efficiency

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The Canadian family-office landscape has evolved over the last 15 years. Thanks to the growth in single-and multi-family offices, wealthy Canadian families now have multiple avenues to consider when contemplating the management of their wealth, now and for future generations.

One investment option worth exploring is a proprietary/bespoke investment fund, created by a regulated Investment Fund Manager (IFM). A bespoke fund can offer many benefits, especially for those families with a net worth of more than $100 million and multiple members.

Generally, a bespoke investment fund can assist family offices in the development and implementation of comprehensive investment strategies while also taking advantage of efficiencies and economies of scale. A bespoke fund can be designed to include single or multiple asset classes and hold segregated securities, other funds (in a fund-of-fund structure), or both.

Overall, bespoke funds can meet the sophisticated needs of family offices and family members to which there is a fiduciary responsibility.

Diversification and accessing talent

Bespoke funds can bring many advantages. Among them are the ability to ensure ideal levels of diversification and also engage investment managers outside the country or those who have high minimum thresholds.

• Diversification: A fund can provide a diversified investment strategy – for example, by launching three funds (e.g., fixed income, equity, and alternatives) using selected underlying investment managers. Family members would invest across the three funds for an efficient balanced investment strategy. Funds can be constructed by any asset class and with any number of underlying managers.
• Access to talent beyond borders: A fund can be used to engage foreign investment managers not available in Canada – for example, a manager based in Hong Kong could be the sub-advisor of the fund. This avoids the potential tax consequences of investing offshore if the foreign manager only offers an offshore vehicle to Canadian investors. Further, a fund counts as a single entity, allowing the foreign manager to deal with a Canadian entity under an exemption and potentially avoiding full registration in Canada.
• Access to talent with high minimums: The pooling of family members’ capital can allow for access to investment managers with high minimum investment thresholds. This also allows a manager to deal with a single entity.

Efficiency considerations

Bespoke investment vehicles allow for many efficiencies. They include, but are not limited to, the following:

• Ease of investment: As per the diversification example above, family members would need to complete fewer account-opening documents versus opening documents with each individual manager across each asset class. For three funds with two underlying managers each, family members would have to complete three account-opening documents at most rather than six.
• Ease of administration: An IFM can assist with coordinating fund flows between the family and underlying managers. The family would send a single wire and the IFM would distribute the funds according to an agreed-upon implementation plan. Another factor to consider is that a single tax slip would be provided by the IFM rather than multiple slips provided by individual managers.
• Ability to negotiate fees: Aggregating family assets can allow for greater negotiating power in regard to fees. Investment managers benefit from dealing with a single entity and are likely to be open to providing a favorable fee arrangement. If a manager is unwilling to negotiate fees, at a minimum, aggregating assets can reduce overall fees if a manager offers a tiered fee schedule.

Regulatory considerations

As with any investment vehicle, regulations must be followed. The IFM handles all regulatory oversight and responsibility in launching the fund. The IFM also acts as the liaison with regulators, allowing the family office to benefit from a bespoke fund without having to deal directly with them.

Further, a family would only conduct a single annual “know your client” meeting for a bespoke fund rather than multiple meetings with underlying investment managers. Given the number of potential meetings, using a fund structure can lead to time savings over the course of a year.

Design considerations

Once a family office decides to develop a bespoke fund, the family must also consider tax structure and terms, including withdrawal provisions. An IFM should work with the family and any trusted advisors, including tax and legal, to determine the best structure to meet the objectives of the vehicle.

Privacy

By having the IFM act as liaison with the investment managers, a level of confidentiality is maintained as to the identity of the family office behind the bespoke fund. However, the IFM can liaise with investment managers to arrange due diligence/update meetings as required. The level of communication and transparency with the underlying managers can be adjusted as required (subject to regulations, of course).

Dan Riverso is the Chief Investment Officer at Jesselton Capital Management Inc., which provides a customized, private and confidential platform for the investing needs of high-net-worth individuals and families. Jesselton, based in Toronto, is registered with the Ontario Securities Commission as an Investment Fund Manager and Exempt Market Dealer. Dan has 20 years of experience working with Canada’s wealthiest families.