DEFINITION of 'Clone Fund'
A mutual fund that aims to replicate the performance or strategy of a larger, successful mutual fund. A clone fund may be set up by a mutual fund company when the original fund has grown too big to be managed efficiently, or if the company wishes to introduce a different pricing structure. In Canada, clone funds referred specifically to funds that used derivatives to bypass the foreign content restriction that previously existed in retirement accounts.
BREAKING DOWN 'Clone Fund'
While the investment objective of a clone fund is to match the performance of the original fund, its actual performance may differ, depending on a number of factors, such as whether the portfolio manager/s are the same for both funds, and the differences (if any) in investment style and trade execution for the two funds.
Clone funds were popular in Canada earlier because the amount of foreign content in registered retirement savings plans (RRSPs) was restricted, until a legislative change in 2005 eliminated the 30% foreign content limit. When the foreign content restrictions were in effect, a Canadian investor who wished to invest in the S&P 500, but was already at the 30% limit in his or her RRSP, could do so by investing in an S&P 500 clone fund offered by a number of Canadian mutual fund companies. While these funds were devised to replicate the performance of the S&P 500, they were classified as Canadian property since their main assets consisted of derivatives trading in Canada.