A captive fund is a fund that provides investment services to a single group or parent company. Common in private equity and corporate America, a captive fund is defined by the fact its ownership is limited to a select group of people, and is not open to the public.
Captive funds can be used as an employee benefit to allow employees and other insiders to invest in funds managed by their employer, or to manage the assets of a corporate entity.
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Examples of captive funds
Captive funds are somewhat common on Wall Street and in corporate America. Perhaps the best example of a captive fund is the Medallion Fund, which is owned by employees and ex-employees of fund manager Renaissance Technologies.
The ability to invest in Medallion is one of the most lucrative of employee perks.Records show that from 2001 to 2013, the fund's worst performance was a 21% gain! The fund nearly doubled its investors' wealth in 2008, when U.S. stocks lost nearly 39% of their value. Medallion is obviously an outlier in terms of performance for captive funds, but it is a very good example because it only manages the capital of its employees.
Similarly, tech companies often employ captive funds to manage their growing piles of cash. Google Ventures, which makes venture capital investments on behalf of Alphabet, is one such example.
The fund has invested in up and coming tech companies like Uber, OnDeck, Periscope, and Slack. Maintaining a captive venture capital fund allows Alphabet to earn a return on its capital, while making strategic investments that may help its core internet business.Because Google Ventures makes investments with the capital of its corporate parent, Alphabet, and not outsiders, it is another example of a captive investment fund.
Apple also has a captive fund of its own. A subsidiary known as Braeburn Capital manages a substantial portion of its cash, but unlike Google Ventures, Braeburn Capital is rumored to be more "plain-vanilla" in its investment strategies.
Apple reported having more than $233 billion invested in corporate bonds, U.S. Treasuries, certificates of deposits, and other investments as of 2016, which is widely believed to be entrusted to its captive manager, Braeburn Capital. A captive fund allows the company to earn a return on its capital while avoiding California state taxes due to Braeburn's Reno, Nevada operations. Given the sheer size of Apple's investment portfolio, using a captive fund staffed with in-house analysts and portfolio managers is likely more economical than using the services of third-party asset managers.
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