Our Insights

About personal finance, investments and markets.
October 26, 2015

The worst possible investment

A pecularity of the German investment landscape is the so-called „geschlossener Fonds“. Although it sounds similar, it has nothing to do with closed-end funds in the UK or the US. The sale of „geschlossene Fonds“ to private investors is illegal in most European countries, including the UK and France and for very good reasons. In our opinion, they are simply toxic. Though they can be bought in Germany if you are an expat living here, we believe you should avoid them at all costs.

We will not spend too much time on this subject, as these funds are only available locally. Please don’t hesitate to contact us if you have any specific questions.

So what exactly is a „geschlossener Fonds“?

„Geschlossener Fonds“ is a type of investment fund that raises money for a specific investment such as property, container ships or solar energy parks. After the money is raised, the fund is ‚closed‘, i.e. it has no liquidity. You cannot trade in-or-out of the fund, meaning you are locked up for a very long period of time. These funds typically have investment periods of >10 years. Besides a lack of liquidity, there are other major problems as we see it:

  • Very lightly regulated compared to public mutual funds
  • Very high commission around 10-20%, leading to a significant conlict of interest
  • Most issuing firms are small and have next to no track record
  • The prospectus is simply too complicated for most individual investors to understand.

If this sounds ridiculuous to you, you are not alone. If this sounds extraordinary to you, than you are not familiar with the German regulatory landscape…

What’s the performance?

Geschlossene Fonds are very popular in Germany – every year domestic investors pour billions into them at the behest of their financial advisors who stand to earn a huge commission (see the problem?). But the results are downright shocking. As a leading consumer protection organisation has found out in a recent study, only 6% of all the analysed funds delivered returns anywhere close to what they promised. A staggering 69% lead to losses.

 

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