Reviewed by Aug 27, 2020| Updated on
Incubated funds are those funds which are privately offered to investors during its incubation period. These funds are first made available to employees affiliated with the fund.
Incubation funds are generally used by hedge funds as a course of action to experiment with new strategies and offerings. Since only a finite number of funds are offered, they are also referred to as limited distribution funds.
Understanding Incubated Fund
When a fund company tries to experiment with its new funds during its incubation period, the funds are first advertised to a specific group of potential investors, usually employees and their family members. These incubated funds are made available only for a specific trial period.
Incubated funds, over time, have proven to be an effective way of experimenting with new strategies for fund companies. The fund also allows the company to monitor its trading mechanisms and costs of transactions.
Factors to Consider
Generally, incubated funds are launched when the company feels that a particular fund strategy is susceptible to high risks. In this way, the fund company will able to revise and test a new fund strategy by offering them to its employees.
The basic idea behind the launch of an incubated fund is to test if the investment made in the new fund strategy can outweigh the losses of an unsuccessful fund which could tank in a short span after launch.
An incubated fund is made available to the public for investment only if the fund has managed to perform successfully in its trial period. This trial period can range from as short as three years to as long as 20 years, depending on the company's objectives. Once the incubation phase is complete, the fund company will decide on whether the fund should be made available for a public offering or not depending on the test strategy success during the incubation period.