A note fund is a pooled investment: a number of investors put money into one entity, a manager spends it on notes, and each investor owns a share of that entity. The notes belong to the fund, and the manager decides which ones it buys.
How a fund is put together
The fund itself is a legal entity, such as a company or a partnership, formed for the purpose. Its manager, sometimes called the sponsor, raises the money, buys notes in the fund’s name, hires a servicer to collect the payments and distributes what remains after costs.
Everything else is set by the offering documents: what the fund may buy, how the manager is paid, when investors receive money, and when and how an investor can leave.
| Share in a note fund | A note you own | |
|---|---|---|
| What you own | A share of an entity | The note and the lien behind it |
| Who picks the notes | The manager | You |
| Who does the due diligence | The manager | You, with your attorney and title company |
| Spread of risk | Across the notes the fund holds | One payer, one property |
| Costs | Manager’s fees, set by the fund documents | Servicing, legal and recording costs you pay directly |
| Getting out | Only as the fund documents allow | You can offer the note, or part of it, for sale when you choose |
| If a payer defaults | The manager decides what to do | You decide |
What the pooling buys you, and what it costs
Spread is the main gain. Your money sits across a number of payers and properties, so a single default takes a smaller bite than it would if that note were all you owned. The work moves off your desk as well, since the manager’s team reads the files, orders title and deals with payers in trouble. For someone who wants exposure to notes without learning the mechanics, those are real advantages.
The cost is control and visibility. Your result rests on the manager’s judgment and honesty, and on fees you have no room to negotiate. Fund documents can hold your money for a fixed period and restrict withdrawals afterward, so read the exit terms before anything else.
You also stand one step further from the collateral. The owner of a note is secured directly by the property. The owner of a fund share has a claim on the fund, and it is the fund that holds the liens.
What to ask a fund manager
- What kind of notes does the fund buy: performing or non-performing, first liens or seconds, and in which states?
- How is the manager paid, and is any of it taken before investors receive anything?
- Does the manager have its own money in the fund?
- How are the notes valued when the fund reports to you, and who checks that valuation?
- Who holds the collateral files, and who services the notes?
- Does the fund borrow, and against what?
- When can you withdraw, and what happens if a large number of investors ask at once?
Interests in a fund are generally treated as securities, which brings rules about how they may be offered and who may buy them. How those rules apply depends on the offering and on your own circumstances, so read the offering documents in full and have a securities attorney or a financial adviser review them before you commit. Whether a particular fund suits you is a question for that adviser, and one we cannot answer.
How this differs from what we do
We work with individual notes and partials. A buyer on our list is sent one note at a time with the figures behind the price and makes their own decision on it, which suits people who want to own the paper directly and are willing to do the checking. That is the route in how note investing works, and it carries the risks of note investing undiluted, because everything rides on one payer.
If a whole note is more than you want in one position, buying part of a note is a smaller way to hold paper directly.
Decide who does the choosing
The first decision is whether you want to pick notes yourself or pay someone to pick them. If you would rather pick, find out from the investor guide what the picking involves, and join the buyer list to see how a single note is presented when it is offered. If you would rather delegate, take the questions above to the manager and the answers to your attorney.
Related questions
Is a note fund safer than buying a single note?
It spreads your money across more payers and properties, which reduces the effect of any one default. It adds a different risk: you depend on the manager's decisions and on terms you cannot change. Neither is safe in the sense of being free of risk.
Can anyone invest in a note fund?
That depends on the offering. Fund interests are generally treated as securities, and an offering can be limited to investors who meet certain financial tests. The offering documents say who may invest, and a securities attorney can tell you where you stand.
Does Note Brokering run a note fund?
We work with individual notes and partials. Buyers on our list see one note at a time and make their own decision on each.