What is a Common Fund?
A common fund is a type of investment strategy that makes use of laws regarding the creation of contracts rather than relying on an arrangement that includes the use of a trust, insurance policy, or corporation to establish the opportunity among a select group of investors. Also known in some parts of the world as a common contractual fund, this collective investment scheme generally allows for each participant to benefit from the returns generated by the investments held by the fund. At the same time, this approach allows for any expenses associated with the administration of the fund to be shared jointly by all participants. In most nations, the structuring of this type of fund follows what is known as common fund doctrine.
With a common fund, the idea is to create some sort of financial fund that provides benefits to the participants in an ongoing manner, This sort of fund may be established by investors choosing to contribute resources to the fund that are then invested according to the wishes of the group. An administrator oversees the progress of the fund and keeps members aware of what is happening with the investment. Any legal fees or administrative costs are deducted from the resources of the fund, making it possible for all members to share equally in the cost of keeping the common fund in operation.
This approach can also sometimes be used when an attorney takes on some sort of class action suit on behalf of a group of individuals. Assuming that the suit is successful, the proceeds from the legal action are placed into what is known as a common fund class action account. Any legal fees related to the action are paid out of those proceeds, and the remainder of the fund balance can be distributed among the litigants. If the structure of the settlement or court decision calls for ongoing disbursements to the victors in the suit, the fund may remain intact to receive payments that are then disbursed to each of the parties in the suit on a regular basis. When this is the case, any administrative costs associated with the management of the disbursement process are also paid out of the fund balance.
The common fund is different from some other types of partnerships in that each participant shoulders an equal amount of the expense incurred by the fund’s operation. At the same time, the benefits received from the fund are also generally the same for each participant. This relatively simplistic approach can help to keep administration costs low, prevent much in the way of out of pocket expenses, and in general provide a straightforward means of calculating and managing disbursements.
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