What Is a Crossover Fund?

A crossover fund is an investment fund that holds both public and private equity investments. Crossover funds invest in both publicly traded companies and privately held ones.

Key Takeaways

  • A crossover fund is a type of mutual fund that invests in both publicly-traded companies and those that are privately held.
  • Crossover funds are constructed to offer investors the possibility of a higher return, but that also brings higher risk.
  • Because of the riskier nature of the funds, they are better choices for investors with long-term horizons, rather than those closer to retirement age. 

Understanding a Crossover Fund

A crossover fund offers mutual fund investors a higher potential return. While most mutual funds are designed to offer a steadier return over time, a crossover fund is designed to be a high-yield, high-growth fund. Crossover funds are higher risk, however.

Due to the high risk, this type of fund is not recommended for some investors, especially those nearing retirement age. Crossover funds are considered to be a better long-term investment than a short-term one. Investors in crossover funds should be prepared to accept a good deal of volatility.

Private Equity vs. Public Equity Investments

Most mutual funds hold public equity investments. Public equity refers to companies that are publicly traded on a stock exchange, like the New York Stock Exchange or Nasdaq. Publicly traded companies have a few advantages for investors. Investors in public equity can gain access to the equity risk premium return driver, but because publicly traded companies are regulated by the U.S. Securities and Exchange Commission, they are required to disclose certain information to the public. In addition, all information must be disclosed to everyone at the same time.

Private equity refers to companies that are privately held and do not trade on a public exchange. Because of this, it can be difficult for individual investors to gain access to privately held companies.

Private equity investment comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods. In most cases, considerably long holding periods are often required for private equity investments in order to ensure a turnaround for distressed companies or to enable liquidity events such as an initial public offering or a sale to a public company.

Crossover Fund Return Drivers

Crossover funds attempt to tap into the risk premium behind private equity, while also offering some of the liquidity of the public equity market. Equity risk premium refers to the excess return that investing in the stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of equity investing. The size of the premium varies depending on the level of risk in a particular portfolio and also changes over time as market risk fluctuates. As a rule, high-risk investments are compensated with a higher premium.

While both public and private equity tap into the equity risk premium, private equity investors also expect to be compensated for other risks, including liquidity risk and manager risk.