Fund formation and first-time fund managers
What is a fund of one and who uses it?
Short answer
A fund of one is a private fund set up for a single investor, usually a large family office or institution that wants its own terms. The manager still runs a strategy, but the structure is built around one relationship. It can cost real money to set up, so I would confirm the need first and many sponsors talk to a securities attorney before papering anything.
A fund of one is a private fund with just one investor in it. It is usually built for a large family office or institution that wants terms shaped around them instead of the standard terms every other limited partner gets. The manager runs the strategy, but fees, liquidity, reporting and control can be negotiated with that one investor. Many sponsors talk to a securities attorney about how to set something like this up.
Who tends to use one
- Large family offices that want custom terms or more control over their allocation
- Institutions with their own mandates and requirements
- Managers who want one anchor investor to back a new strategy
I have not made a video just on this structure. But I can tell you how the investors who use it behave. In my experience, family offices come with more barriers than most investor types. They often do more due diligence, have stricter requirements, and negotiate harder on fees.
This clip walks through the five types of hedge fund investors, including how family offices differ from the rest.
Summary and key takeaways from this video
In that video I mention that some family offices do not want to be more than 10 or 15% of your total LP base. A fund of one is the opposite situation. The investor is the whole base. That only works when the investor is big enough and the relationship is strong enough to justify it. Remember there are 20,000 family offices or more globally, so risk preferences vary a lot.
Do not confuse it with a fund of funds
The names sound alike, but they do different jobs. A fund to fund pools money from many investors and spreads it across several managers. I gave the example of a venture capital allocator who diversifies over seven or nine VC funds so one bad run does not hurt. A fund of one has a single investor and usually a single manager.
Check whether a fund is even the right tool
Here is where I see people get ahead of themselves. They spend real money papering a fund before they know what the investor wants. I have seen people spend 20, 50 or 70 thousand dollars on fund documents and then pitch only that.
In this forum I explain why leading with a fund structure can cost you conversations with ultra wealthy investors.
Summary and key takeaways from this video
"Like, the fund is the ultimate structure, but in some cases it's not, right? I think being agile and flexible is the ultimate structure."
If one family office wants to write a big check, ask what they prefer. It might be a direct investment, a debt option or a royalty structure. You do not need all of these papered out. You need a real conversation first. Once you know what they want, your attorney can tell you whether a fund of one, a co-investment or something else fits.
I also tell new managers to step up their size over time. Start where you can win, build a record, and grow from there. A single anchor investor can be part of that path, but it should come after the trust is built.
What I wrote about this
Size often helps an investor earn custom terms. Once an investor writes a check above a $20 million or $30 million size, I have seen them negotiate more on fees and get customized portfolios and advisory services included. That is the logic behind a fund of one. Many family offices also use fund-of-funds because they do not have the resources in-house to hire and fire 10 or 15 hedge fund managers. So before you offer a custom vehicle, ask whether the investor is big enough to justify one and whether they want that kind of manager selection help at all.
"While the fund-of-funds name has seen better days, many family offices I know still invest in a few fund-of-funds because they do not have the resources in-house to hire and fire 10 to 15 hedge fund managers. Also, once you get above a $20 million or $30 million size of investment, you can negotiate more on fees and get customized fund-of-fund portfolios and advisory services included."
On the record
- There are 20,000 family offices or more globally, with a full spectrum of risk preferences.
- Some family offices prefer not to be more than 10 or 15% of a manager's total LP base.
- Richard has seen managers spend 20, 50 or 70 thousand dollars papering a fund before testing investor demand.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: 5 Types of Hedge Fund Investors, Family Office Live Forum: Capital Raising, AI Tools & Investor Feedback (with Richard C. Wilson). Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around fund of one structure, custom investor terms and offering documents. Do not use AI to write your own legal agreements.
Where to start
- Ask the investor how they prefer to invest before you build any structure.
- List the custom terms they want, such as fees, liquidity and reporting.
- Prepare a direct, debt or royalty alternative in case a fund is not the fit.
- Many sponsors talk to a securities attorney about vehicle options and the cost.
- Build trust first, since a single large investor needs it more than anyone.
More questions on this
Is a fund of one the same as a separately managed account?
They are similar in spirit because both serve one investor. The setups can differ in how they are organized, and many sponsors talk to a securities attorney about which one might fit.
Do family offices always want their own fund?
No. Many prefer direct deals, debt or co-investments. I suggest asking before you build anything.
Can a new manager raise a fund of one?
It depends on the investor and your track record. Family offices often want to see a stronger record or a larger fund before they commit.
Related questions
- Why should the management company be separate from the fund?The two do different jobs, so many managers think about keeping them in different entities.
- How much does it cost to set up a private fund?It depends on the structure, the number of investors and the law firm, so I won't give you one number.
- What is the difference between a first close and a final close?The first close is the date your fund accepts its first group of investors and can start operating.
- What does a placement agent do and what do they charge?A placement agent introduces your fund or deal to investors and manages part of the raise.
Work through it with the waterfall calculator. See all fund formation and first-time fund managers resources.