What Is Commingling (Commingled)

In securities investing, commingling (commingled) is when money from different investors is pooled into one fund. There are many benefits to commingling, including lower fees and access to investments with large buy-ins. The term can also refer to the illegal act of using client money for purposes that they did not agree to.

Key Takeaways

  • Commingling is when an investment manager takes money from individual investors and combines it into one fund.
  • Commingling has many benefits, mostly related to scale, including lower fees and access to a wider range of investments.
  • Commingling can also refer to the illegal act of combining client money with personal money without contractual permission to do so.

Understanding Commingling (Commingled)

Commingling involves combining assets contributed by investors into a single fund or investment vehicle. Commingling is a primary feature of most investment funds. It may also be used to combine various types of contributions for various purposes. Below are some examples of investment commingling.

1. If you deposit a paycheck into an inheritance fund, the paycheck would not be considered separate funds but part of the inheritance fund. Thus, the paycheck is no longer considered separate property from the inheritance.

2. In investment management, it is the pooling of individual customer contributions into a single fund, a portion of which is owned by each contributing customer. Commingled funds are managed to a specified objective. A commingled fund structure is used for mutual funds. It is also used to manage institutional investment funds.

Benefits of Commingling

Investors contributing money into a single fund is a structure that has been used in investment management since the first mutual funds were launched. Commingling allows a portfolio manager to comprehensively manage the investment contributions into the portfolio to a specific strategy. Using pooled funds allows fund managers to keep trading costs down since trades can be executed in larger blocks. The commingling of investor contributions does require fund managers to maintain certain positions in cash in order to account for the transactions of the commingled shareholders.

Mutual funds and institutional commingled funds are two of the most popular commingled vehicles in the investment market. Any vehicle that commingles investor contributions for a specified investment goal can be considered a commingled fund. Other types of commingled funds include exchange-traded funds, commingled trust funds, collective investment trusts, and real estate investment trusts.

Standard record keeping allows operational teams to monitor and regularly report fund positions to investors. For mutual fund investors, daily price quotes allow an investor to know their exact position in a mutual fund as a percentage of the fund’s total managed assets. 

Commingled funds offer investors the advantages of scale. A larger pool of money can provide access to investments that may require a larger buy-in. Also, because the work is largely the same for the investment manager, the individual investors can benefit from lower fees than if they had hired their own investment managers to handle smaller sums. Large pools of money may nullify the benefits of smaller investments, however. A small, but good, opportunity might "move the needle" enough to be worth the research and risk to a larger fund since the gains must be spread out among a large group of investors.

Real Estate Commingling/Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are commingled funds. Individuals pool money together to invest in large real estate projects. The trusts themselves are usually operating companies that own and operate income-producing real estate assets like apartments, shopping centers, and office buildings. Investors buy shares of REITs on public exchanges.

Illegal Commingling

In some cases, the commingling of funds may be illegal. This usually occurs when an investment manager combines client money with their own or their firm's, in violation of a contract. Details of an asset management agreement are typically outlined in an investment management contract. An investment manager has a fiduciary responsibility to manage assets according to certain specifications and standards. Assets agreed to be managed as separate cannot be commingled by the investment advisor.

Other situations may also arise where contributions provided by an individual or client must be managed with special care. This can occur in legal cases, corporate client accounts and real estate transactions.