Are Fund Structures Broke? Who is benefiting most?

The current structure of funds, trading platforms, and surrounding regulations supported by the financial industry are not fit for purpose and are causing unnecessary layers of fees and complexity for customers. These structures and platforms were designed to protect the interests of the industry rather than the customers who invest in these funds. As a result, customers are often sold on the notion of "customer protection," but they are being misled by an industry that is more focused on safeguarding its own revenues.

One of the major issues with the current fund structure is the sheer number of fees that are charged to investors. These fees can include management fees, performance fees, custodian fees, and broker fees, among others. In many cases, these fees can amount to a significant percentage of the overall investment, reducing the investor's potential returns. 

In addition to the high fees charged to investors, the current fund structure is also complex and difficult to understand. Many investors are not familiar with the terminology and jargon used in the financial industry, making it difficult for them to make informed decisions about their investments. This lack of understanding can also lead to investors making poor investment choices, which can ultimately compound the deception.

Fortunately, there are technologies today that have the potential to revolutionize the fund industry and provide significant benefits for investors. One such technology is the use of non-fungible tokens (NFTs) to replicate fund structures. NFTs are unique digital assets that are stored on a blockchain and can represent a wide range of assets, including financial instruments such as funds, private equity, derivatives, and even real assets.

Attention: We are not talking about hyped crypto currencies with wild fluctuations; here we are discussing discreet blockchain infrastructure with game-changing benefits. 

The potential use of NFTs in the fund industry is significant and widespread. By using NFTs, fund managers could easily replicate the structure of traditional funds without the need for complex legal structures or trading platforms. Further, NFTs could even act as special purpose vehicles (SPV) for all investments, allowing investors to easily access and trade their assets. This could result in a more transparent and efficient market, where investors have greater control over their assets and are not subject to the same layers of fees and complexity as they are in the traditional fund industry.

Using NFTs to replicate funds has several key advantages over current fund structures. Firstly, NFTs are transparent and can provide investors with full visibility into the performance of their investments. This means that investors can easily monitor the risks and potential returns of their investments in real-time and make informed decisions about their portfolio.

Secondly, NFTs are smart, which means that they can be tailored to the specific needs of individual investors, asset managers, and local regulators. This allows investors to create NFTs that are coded with their investment objectives and risk tolerance, in addition to cherry-picking a range of benefits, including tax 

Thirdly, NFTs can significantly reduce the fees charged to investors. Because NFTs are stored on a blockchain, the costs associated with their creation and management are significantly lower than those of traditional funds. This means that investors can potentially save a significant amount of money on fees, which can be used to increase their overall returns.

Finally, NFTs are easily transferable and can be traded on a variety of platforms, which makes them an ideal and flexible vehicle available to everyone, as opposed to SPV structures used exclusively by the very rich. This allows investors to easily access a wide range of assets and to quickly move their investments between different NFTs and platforms.

In conclusion, the current fund structure and trading platforms used by the financial industry are antiquated and are causing unnecessary complexity and fees for investors. However, technologies such as NFTs have the potential to revolutionize the fund industry and provide significant benefits for all investors at a fraction of the cost. By using NFTs to replicate funds, investors can gain greater transparency, customization, control, cost savings, and flexibility in all their investments and asset holdings. 

Tech-savvy competitors that can leverage new technologies to create compelling offerings for consumers are around the corner. Incumbent financial institutions that fail to adapt may face declining market share, reduced profitability, and ultimately, obsolescence.

The opinions expressed in this blog are the author’s own (presented in a non-professional capacity) and do not reflect the view of his employer, its affiliates, or any other professional services provider or organization whatsoever. The strategies presented are thematic and do not constitute investment advice (or advice of any kind). No assurance can be given that the objectives of the aforementioned investment strategies will be achieved; the strategies involve risk (including, without limitation, illiquidity risk) and may incur a loss on some or all capital deployed. The opinions expressed, or indeed the information or assumptions that underpin them, may contain errors, mistakes, or omissions; no assurance or warranty can be made as to the accuracy or completeness of this information, and readers should not place any reliance on this content for the purposes of executing investment decisions or for any other purpose. In any case, the author reserves the right to change his mind; as his thoughts and opinions may evolve or change to reflect an open mind. Readers accept full responsibility for the use of this content; and are kindly requested to consult with their professional advisor before making any investment decision related to the same.

By Louay Aldoory

Louay Aldoory is the Founder at 1648 Capital. 1648 Capital is a corporate advisory and private markets platform partnering with founders, shareholders, and investors on complex growth, restructuring, and capital structuring initiatives. We combine strategic insight with execution discipline, supporting businesses from transformation through to institutional capital alignment.

The strategies presented are thematic and do not constitute investment advice (or advice of any kind). No assurance can be given that the objectives of the investment above strategies will be achieved; the strategies involve risk (including, without limitation, illiquidity risk) and may incur a loss on some or all capital deployed. The opinions expressed, or indeed the information or assumptions that underpin them, may contain errors, mistakes, or omissions; no assurance or warranty can be made as to the accuracy or completeness of this information, and readers should not place any reliance on this content to execute investment decisions or for any other purpose. Readers accept full responsibility for using this content and are kindly requested to consult with their professional advisor before making any investment decision related to the same.

CHANGE BEGINS WITH A CONVERSATION