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Daily Finance & Accounting Tips

🀫 The investment funds cheat sheet

Published over 1 year agoΒ β€’Β 4 min read

Hey Reader,
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I once was tasked with creating a forecast for a VC fund...and to be honest, I had no idea where to begin.

Funds have always been really complicated until I really understood the way they operate.

Today, I want to share with you my learnings so that anytime you come across work for a fund, you have that much more experience and can do a good job.

Let's begin!

What we’re going to talk about

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This newsletter is sponsored by Mighty Digits.

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A fund is an investment vehicle that collects capital from investors and then deploys that capital into various investments.
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The hope is that the return on investments that the fund makes will exceed the capital invested (plus a minimum return)…
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returning capital to both the investors.
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as well as the fund managers / investment advisors.

Management Fee β†’ Often times there’s a fee associated with managing the fund based on a % of Assets Under Management (AUM).

Carried Interest β†’ Some funds have a performance kicker, where the General Partner gets a % of the funds return once a β€œhurdle” is reached.

The GP takes their performance kicker, then returns the profits to the investors

Funds can either be Private funds, or Registered funds.
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​Private funds generally:
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β€’ are exempt from registering with the SEC
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β€’ can only collect capital from accredited investors (called Limited Partners or β€œLPs”)
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β€’ have less flexible liquidity options

Registered funds generally:
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β€’ must register with the SEC
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β€’ can collect capital from a wider range of individuals
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β€’ offer same day liquidity

The most common funds are:
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​Hedge Funds​
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πŸ’Έ capital is oftentimes invested in public equities
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⏱️ no specific exit strategy or timeline
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​Venture Capital Funds (VC)​
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πŸ’Έ capital is invested in high-growth startups
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⏱️ funds are typically 10 years (though can be extended)
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​Private Equity Funds (PE)​
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πŸ’Έ capital is invested in later-stage, private companies (generally those that are profitable)
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⏱️ funds are typically 10 years (though can be extended)
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​Credit Funds​
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πŸ’Έ capital is invested in debt instruments
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⏱️ funds life cycle is usually 7-10 years

Mutual Funds​
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πŸ’Έ capital is oftentimes invested in stocks / bonds
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ex: Vanguard 500index funds (VFIAX), which aims to replicate the performance of the S&P 500 index
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​Index Funds​
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πŸ’Έ capital is invested in assets matching index components
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ex: S&P 500, which is an index of the 500 largest publicly traded companies
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​Exchange Traded Funds (ETFs)​
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πŸ’Έ similar to an index fund, only it’s traded on stock exchanges
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ex: SPDRY S&P 500 ETF Trust (SPY)
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​Real Estate Investment Trusts (REITs)​
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πŸ’Έ capital is invested in real estate properties or assets
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ex: Vanguard Real Estate ETF (VNQ)

That’s my take on funds…I learned a TON while preparing this.
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and I have a lot more to learn.
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What would you add?
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Let me know by replying to this email.

Till next time!

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​Fractional CFO for Startups | Founder & CEO at Mighty Digits

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Your CFO Guy

NEW YORK, United States of America
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