Clone funds replicate the structure and performance of an index or similar fund using derivatives. They were once popular for generating income for retirement plans but are now less common. Clone funds can be insured at a lower price than mutual funds, but restrictions now limit their use in retirement and investment packages.
The clone fund is an investment strategy that involves duplicating the structure and performance of an index or similar fund. In most cases, this replication activity is achieved with the application of derivatives to the cloning background. Once considered a very popular approach to build on the success of a more 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 insured at a lower price than the mutual funds that serve as the model or standard for the endeavor. The expectation is that by following the same basic plan and structure as the model, the clone fund will have a better chance of replicating the success of the investment. From this perspective, investing in clones is believed to carry a slightly lower degree of risk, while opening the door to a higher degree of return.
In times past, many corporations would use a clone fund approach as part of generating income for retirement plans. Because there were no restrictions on whether mutual funds had to involve a clone of a domestic or foreign mutual fund deal, this meant that the corporation could choose to invest in offerings that might not meet the regulatory standards required for domestic offerings. The potential to generate a large amount of return was certainly there, but the possibility of losses in this particular application was also increased.
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 total value of mutual funds include clones. This helps ensure that most investments used as part of retirement plans are governed by the same regulations and therefore demonstrate acceptable levels of risk.
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