Introduction to Fund Structures

The underlying assets of a fund — sometimes called the "scheme property" — are the investments the fund actually holds. The nature of these assets is the single most important determinant of a fund's risk, return, and liquidity characteristics.

Public Market Assets

Most retail funds invest in assets traded on public exchanges:

• Equities (stocks): Shares in listed companies. Equity funds may focus on geography (UK, US, global), market capitalisation (large-cap, small-cap), sector (technology, healthcare), or style (growth, value).
• Fixed income (bonds): Government bonds (gilts, treasuries), corporate bonds, high-yield bonds, and inflation-linked securities. Bond funds vary by duration, credit quality, and currency.
• Money market instruments: Short-term, highly liquid debt instruments such as treasury bills and commercial paper. Money market funds prioritise capital preservation and liquidity.
• Listed alternatives: REITs (Real Estate Investment Trusts), listed infrastructure companies, commodity ETFs, and other publicly traded vehicles that provide exposure to alternative asset classes.

Private Market Assets

Funds investing in private markets hold assets that are not traded on public exchanges:

• Private equity: Direct ownership stakes in unlisted companies, typically acquired through buyouts, growth capital investments, or venture capital.
• Private credit: Loans made directly to companies or projects, bypassing the traditional banking system. Includes direct lending, mezzanine debt, and distressed credit.
• Real estate: Direct ownership of property — commercial, residential, or development sites.
• Infrastructure: Ownership of physical assets such as roads, bridges, power stations, fibre networks, and renewable energy installations.
• Natural resources: Forestry, farmland, mining rights, and other resource-based investments.

Why It Matters

The distinction between public and private assets has profound implications for fund structure. Public assets can be valued daily and sold quickly; private assets may be valued quarterly and take months or years to sell. This asymmetry drives many of the structural differences we explore in subsequent sections — particularly around liquidity, redemption mechanisms, and dealing frequency.

A fund's investment policy — documented in its prospectus or offering memorandum — sets out exactly what types of assets it can hold, in what proportions, and subject to what constraints. Reading and understanding this document is fundamental to evaluating any fund.

Every fund requires a fund manager — the entity responsible for making investment decisions and operating the fund in accordance with its stated objectives and regulatory requirements. The role is multifaceted, combining investment expertise with operational, legal, and fiduciary responsibilities.

The Authorised Fund Manager (AFM)

In the UK, the entity legally responsible for managing an authorised fund is the Authorised Fund Manager (AFM). The AFM is authorised by the FCA and bears ultimate responsibility for:

• Investment management: Selecting and managing the fund's portfolio in line with its investment policy.
• Valuation: Ensuring the fund's assets are accurately and fairly valued.
• Compliance: Adhering to the FCA's COLL sourcebook rules and all applicable regulations.
• Investor communication: Producing fund factsheets, annual reports, and Key Investor Information Documents (KIIDs) or PRIIPs KIDs.
• Risk management: Monitoring and managing portfolio risk, liquidity risk, counterparty risk, and operational risk.

Delegation

In practice, the AFM often delegates day-to-day investment management to a specialist investment manager — which may be a separate entity within the same corporate group or an entirely independent firm. This delegation model is common in the UK fund industry: a management company (ManCo) acts as AFM and handles governance and compliance, while an investment boutique provides the portfolio management expertise.

Crucially, delegation of investment management does not delegate responsibility. The AFM remains accountable for the fund's compliance and the quality of its operations, regardless of any outsourcing arrangements.

The Depositary

Alongside the AFM, every UK authorised fund must appoint an independent depositary. The depositary acts as a safeguard for investors' interests:

• Custody: Holding the fund's assets (or verifying ownership) to protect against fraud or misappropriation.
• Oversight: Monitoring the AFM's compliance with the fund's prospectus, COLL rules, and valuation procedures.
• Cash monitoring: Ensuring investor cash flows are properly handled and reconciled.

The depositary structure provides an important layer of investor protection — separating the entity that manages the assets from the entity that safekeeps them.

Fees

Fund managers charge fees for their services, typically structured as:

• Annual management charge (AMC): A percentage of the fund's net asset value, usually ranging from 0.1% (for passive index trackers) to 2.0% or more (for specialist alternative strategies).
• Ongoing charges figure (OCF): The total annual cost of running the fund, including the AMC plus administrative, custody, audit, and other operating expenses. This is the figure investors should focus on.
• Performance fees: Common in alternative funds, these reward the manager for exceeding a defined benchmark or hurdle rate. Typical structures include "2 and 20" (2% management fee, 20% of profits above a hurdle), though fee compression across the industry is driving these lower.
• Entry/exit charges: Less common in modern funds but still found in some products — a one-off fee charged when investing or redeeming.

One of the most fundamental structural distinctions in fund design is whether a fund is open-ended or closed-ended. This distinction determines how investors buy and sell their holdings, how the fund manages liquidity, and how the fund's price relates to its underlying asset value.

Open-Ended Funds

An open-ended fund creates and cancels units (or shares) in response to investor demand:

• Subscriptions: When an investor buys units, the fund creates new units and invests the incoming capital. The fund grows in size.
• Redemptions: When an investor sells units, the fund cancels those units and returns cash — potentially by selling underlying assets. The fund shrinks in size.
• Pricing: Units are priced at the fund's net asset value (NAV) per unit, calculated by dividing the total value of the fund's assets (minus liabilities) by the number of units outstanding.
• Dealing frequency: Most open-ended retail funds deal daily, meaning investors can buy or sell on any business day. However, funds investing in less liquid assets may deal weekly, monthly, or quarterly.

The key advantage of open-ended funds is convenience — investors can enter and exit at NAV without needing to find a buyer or seller. The key risk is a liquidity mismatch: if the fund offers daily redemptions but holds assets that cannot be sold quickly, a wave of redemptions can force the manager to sell assets at distressed prices or suspend dealing entirely.

This liquidity mismatch was vividly illustrated during the UK commercial property fund suspensions of 2016 (post-Brexit referendum) and 2020 (COVID-19), when several major open-ended property funds were forced to gate or suspend redemptions.

Closed-Ended Funds

A closed-ended fund issues a fixed number of shares, typically through an initial offering (IPO or placing). After launch:

• No new shares created: The fund does not grow or shrink based on investor demand. Capital is fixed.
• Secondary market trading: Investors buy and sell shares on a stock exchange (e.g., the London Stock Exchange). The fund itself is not involved in these transactions.
• Price vs NAV: Because shares trade on a market, the share price may differ from the underlying NAV. Shares trading above NAV are at a premium; those below NAV are at a discount.
• No liquidity mismatch: Because the fund does not need to sell assets to meet redemptions, it can hold illiquid assets without structural risk. This makes closed-ended funds well-suited to alternative investments.

In the UK, the most prominent closed-ended fund structure is the investment trust — a public limited company whose shares are listed on the London Stock Exchange. Investment trusts have been used since the 1860s and remain popular vehicles for private equity, infrastructure, renewable energy, and real estate exposure.

Semi-Liquid and Interval Structures

Newer fund structures — including the LTAF and ELTIF 2.0 — occupy a middle ground between fully open-ended and fully closed-ended. These "semi-liquid" or "interval" structures offer periodic redemption windows (e.g., quarterly) with notice periods, combining some of the accessibility of open-ended funds with the structural stability of closed-ended vehicles.

The legal structure of a fund determines its governance, tax treatment, and the legal relationship between investors and the fund. In the UK, three primary structures dominate:

Authorised Unit Trust (AUT)

The oldest and most traditional UK fund structure. An AUT is a trust — a legal arrangement where:

• Investors hold units representing a beneficial interest in the trust's assets.
• A trustee (the depositary equivalent) holds legal title to the assets on behalf of unitholders.
• The manager makes investment decisions within the trust deed's parameters.

AUTs are governed by trust law and the FCA's COLL sourcebook. They were the dominant UK retail fund structure for decades but have been largely superseded by OEICs for new fund launches.

Open-Ended Investment Company (OEIC)

An OEIC is a corporate structure — an investment company incorporated under the Open-Ended Investment Companies Regulations 2001:

• Investors hold shares in the company (not units in a trust).
• The company has a board of directors, though in practice the AFM typically serves as the Authorised Corporate Director (ACD).
• An independent depositary safeguards assets and oversees compliance.
• OEICs can offer multiple sub-funds and share classes within a single umbrella structure, making them operationally efficient for fund ranges.

OEICs have become the default structure for new UK authorised fund launches due to their flexibility, single pricing model (unlike AUTs, which historically used dual pricing with bid/offer spreads), and compatibility with European distribution.

Authorised Contractual Scheme (ACS)

Introduced in 2013, the ACS is a contractual (co-ownership) structure designed primarily for institutional investors:

• Investors are treated as co-owners of the underlying assets, not shareholders in a company or unitholders in a trust.
• The structure is tax-transparent: income and gains pass through to investors without fund-level taxation, avoiding the "double taxation" that can occur with corporate structures.
• ACSs are typically used by pension funds, insurers, and other institutional investors for whom tax transparency is a significant benefit.

ACSs are not available to retail investors and are less commonly discussed in consumer-facing materials, but they play an important role in the institutional fund landscape.

Other Structures

Beyond these three authorised structures, the UK fund universe includes:

• Investment trusts: Listed, closed-ended companies (as discussed above).
• Limited partnerships: The standard structure for private equity, venture capital, and other institutional alternative funds. Investors are limited partners (LPs); the fund manager is the general partner (GP).
• Unregulated funds (UCIS): Collective investment schemes that are not authorised by the FCA and cannot be marketed to retail investors.

The choice of legal structure has practical implications for governance (who makes decisions and how), taxation (whether the fund pays tax at the fund level or passes income through to investors), regulation (which FCA rules apply), and cost (administrative and legal expenses).

Liquidity — the ability to convert an investment back into cash — is one of the most important and least understood aspects of fund investing. The liquidity characteristics of a fund are determined by three factors: the liquidity of its underlying assets, its legal structure, and its specific redemption mechanisms.

The Liquidity Spectrum

Fund liquidity exists on a spectrum:

Liquidity Level	Dealing Frequency	Typical Assets	Examples
High	Daily (continuous for ETFs)	Listed equities, government bonds	UCITS equity funds, bond ETFs
Medium	Daily to weekly	Corporate bonds, smaller equities	High-yield bond funds, small-cap funds
Low-Medium	Monthly to quarterly	Property, infrastructure, private credit	LTAFs, ELTIF 2.0s
Low	No regular redemption	Private equity, venture capital	PE limited partnerships, closed-ended funds

Redemption Mechanisms

Different fund structures use different mechanisms to manage investor exits:

• Daily dealing at NAV: The standard for open-ended UCITS and most retail OEICs/AUTs. Investors submit a redemption request and receive cash (typically T+2 to T+4 settlement) at the day's calculated NAV.
• Notice periods: Some funds require advance notice of redemption — typically 30 to 90 days. This gives the manager time to arrange asset sales without fire-sale pressure. LTAFs require a minimum 90-day notice period for retail investors.
• Redemption windows: Semi-liquid funds may only accept redemption requests during defined windows (e.g., quarterly). Requests submitted outside these windows are held until the next window opens.
• Matching mechanisms: Some funds (notably ELTIF 2.0s) pair redeeming investors with new subscribers, allowing liquidity without asset sales. If no match is found, the redemption may be deferred.
• Secondary market sale: For closed-ended funds (investment trusts), investors sell shares on the stock exchange. The fund is not involved, and the price received depends on market supply and demand.

Liquidity Management Tools

Fund managers and regulators have developed several tools to manage liquidity stress:

• Swing pricing: Adjusting the NAV up or down to reflect the transaction costs of buying or selling assets. Redeeming investors bear the cost of selling assets, protecting remaining holders.
• Redemption gates: Limiting the proportion of the fund that can be redeemed in any single dealing period (e.g., 5% per quarter). Excess requests are queued for the next period.
• Dealing suspensions: In extreme circumstances, the AFM may temporarily suspend dealing entirely. This is a last resort and requires FCA notification.
• Anti-dilution levies: A charge applied to redeeming (or subscribing) investors to cover the costs their transaction imposes on the fund.
• In-kind redemptions: Returning underlying assets rather than cash — typically only available to large institutional investors.

The Liquidity Mismatch Problem

The central tension in fund design is matching the liquidity offered to investors with the liquidity of the underlying assets. Offering daily redemptions on a fund that holds illiquid commercial property or private equity creates a structural vulnerability — one that has been repeatedly exposed during market stress events.

The development of semi-liquid structures like the LTAF and ELTIF 2.0 represents the industry's attempt to resolve this tension: offering meaningful but not unlimited liquidity, with appropriate notice periods and anti-dilution tools, while allowing funds to invest in genuinely long-term assets.

For investors, the key takeaway is straightforward: always understand a fund's liquidity terms before investing, not when you need to redeem. The fine print around notice periods, gates, and dealing frequency can be the difference between accessing your capital when needed and finding it locked up during a market downturn.