Fund of One and Separately Managed Accounts
A fund of one is a private fund entity that has a single investor, typically a large institution or family office that wants customized terms. A separately managed account (SMA) is not a fund: the manager invests the client's own account under an advisory agreement. A fund of one gives liability and legal separation and can use a pooled structure, while an SMA gives the client direct ownership and control. Both can trigger adviser rules for the manager.
How they differ
| Fund of one | Separately managed account | |
|---|---|---|
| Structure | A legal entity with one investor | The client's own account managed under contract |
| Who owns assets | The fund entity | The client directly |
| Documents | Operating or partnership agreement, subscription agreement | Investment management agreement |
| Liability separation | Entity-level | Client bears direct exposure |
| Customization | High | High |
Why use a fund of one
- An investor may want a tailored fee or liquidity structure inside a fund wrapper.
- A sponsor may use a fund of one as an on-ramp, then add investors later.
- A separate entity can simplify financing, reporting and holding multiple underlying investments.
Why use an SMA
- The client keeps direct ownership and custody of assets.
- Investment guidelines can be tailored to the client's needs.
- It avoids creating a separate entity for a single client.
Legal issues for each
A fund of one still sells securities, so an exemption is needed, and the sponsor needs investor representations. Its Investment Company Act status depends on the structure, and a fund with one investor may rely on the same exclusions as a larger fund, with attention to how look-through counts the owner. An SMA is an advisory relationship, so the manager's adviser status, registration or exemption and custody obligations come into play. See exempt reporting adviser vs registered adviser.
Questions to settle first
- Does the investor want control rights, such as approval of each deal, and does that fit the sponsor's role as manager?
- Who bears formation and ongoing costs of the separate entity?
- Will the sponsor be able to use the same track record in marketing a later pooled fund, and what must be disclosed about it?
- What are the exit and liquidity terms if the relationship ends?
Adding investors later
Converting a fund of one into a multi-investor fund requires attention to prior side agreements, valuation, and the effect of earlier terms on new investors. Plan for that in the original documents if growth is expected. See side letters and 3(c)(1) vs 3(c)(7).
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Book Free ConsultationFrequently asked questions
Is a fund of one a real fund?
It is a fund entity that happens to have one investor. It is legally a pooled vehicle even though only one party invests.
Does an SMA need a Form D?
An SMA is not a securities offering of fund interests, so a Form D is generally not filed for it, though other rules apply.
Can a family office use a fund of one?
Yes, family offices commonly use funds of one to hold assets under a sponsor's management with customized terms.
Which is cheaper?
An SMA usually has less formation work because there is no new entity. A fund of one adds entity and documents.