What is a Fund?

What is a Fund?
By: Gridline Team | Published: 10/07/2021
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5 minutes

A fund is a pooled investment vehicle, which includes hedge funds, private equity funds (including venture capital, or “VC”), real estate funds, and more. Global alternative investment funds raised nearly $1 trillion in 2020.

Fund managers are responsible for selecting investments and monitoring the performance of those investments over time. Since funds often have long timeframes, they require expertise in many different areas, including finance, marketing, operations, etc. 

A single person can’t possibly be an expert in all those areas. Therefore, fund managers typically employ specialists to help them with aspects of their job like origination and structuring deals or raising capital from investors.

All this is done because of the attractive risk/reward profile achievable through funds. Investing in funds is a great way to diversify your portfolio, boost alpha, and hedge against risks like inflation or market declines.

Types of Funds

Let’s look at a few main types of funds: Private equity (“PE”), hedge funds, and real estate funds.

Private equity funds 

Many private equity funds are available to investors: VC, Buyout, Growth Equity, Distressed, etc. Within these categories, one will find funds focused on specific industries or geographies, funds that focus on certain business strategies or models, and funds that specialize in specific sectors like technology or healthcare.

Private equity offers its investors exposure to privately-owned companies with attractive business attributes or growth prospects. Unlike publicly traded companies, which must disclose financial information each quarter to appease shareholders and analysts, private companies are not required to make public disclosures. Therefore, successful investment outcomes depend on a given PE fund manager’s combined skills with sourcing, investing, operating, and selling attractive private companies.  

Unlike buying a mutual fund, stock, or ETF, investing in a PE fund requires a minimum investment requirement in the form of a commitment. PE fund managers “call” capital from their investors whenever they find a business to invest in, and it may take up to five years for a PE manager to call and invest all of the capital. Also, unlike mutual funds, stocks, or ETFs, investors do not dictate when they get liquidity, rather, distributions are made from the fund by the manager whenever an investment is sold, and it may take up to ten or more years for investors to receive all of their invested capital plus profits. For this reason, investors expect an illiquidity premium over the public markets, usually 2 – 3% per year on average.     

Hedge funds

Hedge funds are private partnerships that traditionally invest most of their assets in publicly traded stocks, bonds, options, or futures contracts. Still, a subset of the portfolio might be invested in private equity. Hedge funds may focus on more speculative investments, make concentrated bets on various market or economic outcomes, offset long equity exposure with short positions, employ various options strategies, and in most cases, utilize leverage. 

Hedge funds are more liquid than PE funds due to the underlying tenor of their investments but still lock up capital for some time. Typical hedge fund lock-up periods are one to two years for contributed capital and a gated liquidity structure after the lock-up period. Gated liquidity refers to a limitation on withdrawals of some percentage of invested capital each quarter to allow the manager to sell investments in an orderly and advantageous manner. Since some of the capital may be invested in private companies or funds, withdrawal limitations may be extended for periods.

Real estate funds

Liquid real estate funds invest in the stocks and bonds of real estate companies, not the underlying properties themselves. They differ from REITs (real estate investment trusts) in that REITs own and operate income-producing properties.

Private real estate funds invest in underlying properties, and managers of these funds may focus on residential, commercial, or farmland. Within the commercial segment, managers may choose from fully-leased Class A or B properties (income producing), older properties that require extensive rehab to increase rents and occupancy (opportunistic), or properties in bankruptcy or financial difficulty (distressed). As with PE funds, real estate funds typically raise capital from various investors and pool it together to form a single capital stack. This capital is then invested into promising opportunities within the industry.

Structure and operations

Let’s look at the structure and operations of funds through the lens of venture capital.

The basic structure is “2 and 20,” in which the VC firm earns a 2% fee on assets managed and 20% carry. The fees’ positive outcome is that the fund’s managers are incentivized to pick quality investments and provide support to get the company to an eventual exit.

Three main players have been involved: The Management Company, the General Partners, and the Limited Partners.

The VC firm is the management company. The firm’s general partner (GP) will raise multiple funds, each with a fund manager. A GP will typically have two to three teams managing those funds. The team structure is fluid and depends on how many deals flow through that fund at any time. Each fund will have a limited number of investors (LPs)  who purchase a share in what the fund owns: the companies being invested in by the fund. 

After raising money from investors, VC firms work to find and evaluate startups. The GPs recruit teams of analysts, developers, and other professionals to scour the market for promising companies. Once a company is identified, it’s brought in-house for due diligence. 

This process typically takes 3-6 months from start to finish. During this time, the GPs will work with the startup’s management team to understand its situation and assess its merits as an investment. If all goes well, an Investment Committee will review the deal, and if they are comfortable with the proposed terms, they vote to approve or reject the investment. 

After constructing a diversified portfolio, VC firms help their portfolio companies to scale and achieve product-market fit. This typically involves providing resources, mentorship, and expertise—the firm becomes a partner to the startup. Once this is achieved, VC firms will work with the company to identify a sale or IPO opportunity. 

These profits are then shared with the investors of that fund.

Advantages of funds

Building a diverse stock portfolio from scratch would be expensive and time-consuming. In contrast, the S&P 500 index fund gives you 500 companies at once. Just like public indices, fund investments provide diversification. 

Most PE funds will invest in as few as a handful to as many as 20 companies per fund. Allocating investments across ten funds provides exposure to 50 – 200 companies. By lowering minimum capital contributions, an investor can create an “index” of funds (built by sector, stage, geography, and so on) that will allow them to deploy $100,000 into ten funds versus $1 million into a single fund and get true diversification.

Another advantage of funds is that GPs are professionals at finding startups and building high-quality portfolios, giving funds managed by these GPs a strategic advantage over an individual investor.


Funds help investors achieve an attractive risk/reward profile. With Gridline, you can gain exposure to alternative funds with lower capital minimums, transparent fees, and greater liquidity.

This opens the world of alternative fund investment to everyone. Our approach is simple: We provide access to unique investment opportunities at your fingertips to help you build an optimized portfolio while we handle the back-office work.

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