Collective Investment Schemes and Fund Management
The Collective Investment Schemes and Fund Management domain tests fund structures, valuation, fee mechanics and the regulatory duties of the manager. Questions typically ask you to compute NAV or a performance fee, or to identify a conflict or liquidity problem in a scheme.
Structures
- Open-ended funds issue and redeem at NAV; closed-ended funds trade on exchange at a premium or discount to NAV.
- ETFs are exchange-traded index trackers; physical versus synthetic replication changes the counterparty exposure.
- Hedge funds carry wider mandates, less frequent dealing, lock-ups and gates, and commonly performance fees.
Valuation and fees
- NAV = (total assets − total liabilities) / shares outstanding, using fair value and a written pricing policy for illiquid or suspended holdings.
- Management fees accrue daily on NAV. Performance fees should apply only above a high-water mark, often with a hurdle; crystallisation frequency matters because annual crystallisation favours the manager in volatile markets.
- Ongoing charges include the management fee but usually exclude transaction costs and performance fees.
Worked example
An investor enters at NAV 100 with high-water mark 100; fee is 20% of gains above the mark, crystallised annually. Year 1 NAV 120: fee = 20% × 20 = 4, NAV 116, new mark 116. Year 2 NAV falls to 105: no fee, mark unchanged. Year 3 NAV 130: gain above mark = 14, fee = 2.80, NAV 127.20. Total fees 6.80. Without the high-water mark, year 3 would charge 20% × 25 = 5.00, and the investor would pay twice for the same recovered value.
Traps
- Charging a performance fee on gross return, or resetting the mark downward after a loss.
- Comparing NAVs across share classes with different fee loads.
- Ignoring liquidity mismatch: daily redemption against illiquid assets needs gates, side pockets or suspension, all disclosed.
- Overlooking the manager's fiduciary duties on expense allocation, soft commissions and cross-trades.
- Treating past performance as evidence of skill rather than of market conditions and fee drag.