What Is a Clone Fund?

A clone fund is a mutual fund strategically designed to emulate the performance of a successful mutual fund. Clone funds are developed to model the performance of larger and more successful mutual funds.

Key Takeaways

  • A clone fund is a mutual fund strategically created to perform as a success of a larger and more successful mutual fund.
  • Some strategies are left to the mutual fund manager's skills and experience, and these strategies can be a challenge to replicate. 
  • Until 2005, when legislation changed Canadian investment rules, clone funds were popular in Canada. 

Understanding Clone Funds

Mutual funds are created by pooling investor funds and investing that money in a portfolio of assets. The fund manager is responsible for operating the fund, choosing which assets to buy or sell over time to maximize their investors' benefits. Philosophy and strategy drive each mutual fundy. And some aspects of these philosophies and strategies are publicly known.

For instance, a particular mutual fund may aim to only focus on a specific industry sector. Another may commit to only invest in environmentally-responsible companies.

Some strategies are left to the mutual fund manager's skills and experience, and these strategies can be a challenge to replicate. 

Canadian Clone Funds

In Canada, clone funds took on a slightly different aspect. Until 2005, when legislation changed Canadian investment rules, the clone funds specifically referred to funds that used derivatives to bypass the foreign content restriction that governed retirement investment accounts.

Myriad differences in investment style, strategy,y, and trade execution can result in distinct differences in clone funds' performances and the funds they emulate. 

Clone funds were once popular in Canada because the amount of foreign content in registered retirement savings plans was limited to 30% foreign content. Legislative changes in 2005 eliminated this restriction, opening Canadian investors more open access to international portfolio assets.

Before 2005, if a Canadian investor had already reached the 30% investment cap wished to invest in the S&P 500, they could get around the restriction by investing in an S&P 500 clone fund offered by a Canadian mutual fund company to replicate the performance of the S&P 500. Since the assets consisted of Canadian derivatives, the assets were classified as Canadian property.

Special Considerations

There are many reasons a fund or fund manager may wish to replicate another fund’s investment strategy. For instance, a mutual fund company may choose to establish clone funds when the original fund has grown too large to be efficiently managed. The mutual fund may also wish to emulate a different pricing structure within the clone fund.

A clone fund's primary objective is to match the original fund's performance, although actual performance can often differ due to several factors. Even within the same mutual fund company, the portfolio managers for the funds may differ.

Because the price of entry to hedge funds is too high for many investors, hedge funds become attractive candidates for cloning. Other clone funds will model themselves on the investment philosophies and strategies of highly successful investors such as Warren Buffett. Still, other clone funds exist to emulate closed funds, temporarily or permanently closed to new investors.