What is a Clone Fund?

The clone fund is an investing strategy that involves duplicating the structure and performance of a similar index or fund. In most cases, this replication activity is achieved with the application of derivatives to the clone fund. Once considered a very popular approach to piggybacking on the success of a better established mutual fund, the strategy has become less common in recent years.

Many investors see some degree of benefit associated with a clone fund approach. Often, clone funds can be secured at a lower price than the mutual funds that serve as the model or standard for the effort. The expectation is that by following the same basic plan and structure as the model, the clone fund will have a greater chance of replicating the success of the investment. From this perspective, investing in clones is thought to carry a slightly lower degree of risk, while opening the door for a greater degree of return.

In times past, many corporations would make use of a clone fund approach as part of the revenue generation for retirement plans. Because there were no restrictions on whether the mutual funds had to involve a clone of a domestic or a foreign mutual fund arrangement, this meant that the corporation could choose to invest in offerings that might not meet the regulatory standards necessary for domestic offerings. The potential for generating a great deal of return was certainly present, but also the chance for losses was increased in this particular application.

Today, many nations place some restrictions on the inclusion of clone fund investments as part of retirement and investment packages. While it is still possible to invest in foreign offerings, many countries now require that no more than a fixed percentage of the overall worth of the mutual funds include clones. This helps to ensure that the majority of the investments used as part of the retirement plans are governed by the same regulations, and thus demonstrate acceptable levels of risk.