What is a Spoke Fund® ?

A Spoke Fund® is a group of separate investor accounts linked to a portfolio containing most of the liquid net worth of that fund’s manager.

“Spoke Fund®” is short for “hub and spoke” model. The portfolio manager’s money is the hub and the spokes lead to each investor’s account. Any changes in the hub are simultaneously made in the spoke accounts. Thanks to technology, this can all be done pretty easily.

I like to think the result is a much more investor-friendly alternative to a mutual fund. I’m biased, though, since I run two Spoke Funds. I also came up with the name “Spoke Fund” because Wall Street didn’t have one for this particular way to invest. It’s not a hedge fund, nor a mutual fund, nor a separately managed account. I think it’s better than them all, for reasons I will soon explain, but, well, there’s that bias thing.

I wouldn’t call it revolutionary. That word comes pretty cheaply these days. I just introduced some new processes to some existing tools to build a fund I’d feel good about putting my family and friends in.

As of today, there are exactly two Spoke Funds® I’m aware of – the Tarpon Folio and Gecko Folio, both run by yours truly at my firm. But I think it’s safe to say our investors love them. I also think Spoke Funds® are an idea that will spread.

In this blog, I’ll be talking more about the benefits of spoke funds for investors. I’m also going to tell any portfolio managers who want to listen exactly how I built them.

So, welcome to Mutual Fund 2.0.

Portfolio managers: check out www.SpokeFund.com for more about how to build a spoke fund.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
This entry was posted in For Investors, Spoke Fund TM and tagged . Bookmark the permalink.

10 Responses to What is a Spoke Fund® ?

  1. David says:

    Hi Cale,

    I’ve been doing some reading to really understand the organization and functioning of the hub and spoke structure. Would this be like the “Master-Feeder” structure that hedge funds use? If so, is that one of the reasons you decided on a LLP versus an LLC? Here’s what I was looking at:

    “Master-Feeder Structure
    This structure, also known as a “hub and spoke,” allows investors residing in the United States and investors residing offshore to invest, indirectly, in the same offshore corporate entity commonly known as the “master fund.” The master fund is typically structured as a limited partnership. Ordinarily, U.S. taxable investors investing in a master-feeder structure directly invest in a limited partnership organized in the United States. This limited partnership is referred to as the “domestic feeder.” The domestic feeder invests its assets in the master fund. The offshore investors and U.S. tax-exempt organizations (e.g. IRAs) directly invest in an offshore corporation. This offshore corporation is referred to as the “offshore feeder.” The offshore feeder also invests its assets in the master fund. The hedge fund manager then purchases and sells securities in an account held in the name of the master fund.”

    http://books.google.com/books?id=9CXLWwVGDbQC&pg=PA101&lpg=PA101&dq=hub+spoke+hedge+fund+partnership&source=bl&ots=2pxm5HNsPV&sig=lw-Gr_0eg1iJ82d1sHoK8ITmujo&hl=en&ei=DAbOSre9J4Kf8Aak5qn9Aw&sa=X&oi=book_result&ct=result&resnum=1#v=onepage&q=hub%20spoke%20hedge%20fund%20partnership&f=false

    I know you said yours isn’t a hedge fund, but I’m just trying to draw a solid line between the two.
    Also, I think you mentioned that any change in the hub will be reflected in the spokes; the way I understand it it that when you dedice to make a purchase, you first buy for the hub, then you place some kind of “bunch” order with Foliofn, provide each spoke’s account number, and purchase a percentage of shares equal to what was bought in the hub. Is that right?

    By the way, I live in the Florida panhandle close to Destin, so I have to say that we really do live near the best beaches in the world! Ok, maybe the Keys are a bit better, but we’re close 😉

    Thanks!

    David

    • Cale Cale says:

      Hi David,

      Yep – I’ll give that to you…beaches up in the panhandle are second to none. Sand is like talcum powder. Plus, you have waves.

      That master-feeder hedge fund structure is a completely different animal. Whether to form your firm as an LLP or LLC is entirely separate from that, and you can be either to set up a Spoke Fund®. The only reason I went with an LLP is because I have delusions of grandeur. More specifically, whenever I am ready to retire, I want to be able to step away, leave my firm to other partners that by then I will have attracted or groomed myself, and then still draw monthly distribution checks from our profits. Simple as that.

      That said, you’re right that a hedge fund is a limited partnership. Investors buy stakes in the partnership to invest in the hedge fund. Spoke Fund investors don’t invest in any partnership. They open accounts at a third party custodian – in our case a broker/dealer named FOLIOfn – under my firm’s management, and in those accounts they all own shares of the same companies. So, investors in mutual funds and hedge funds actually own small pieces of a separate entity – the fund – and not the securities the funds themselves own.

      And no, changes in the hub are much more automated using FOLIOfn. All trades happen at the same time for all accounts, including my own, and there is no further entering of account numbers, “bunch order” or post-trade allocation, like you may already be familiar with. FOLIOfn has dialed it in enough that I simply tweak the Tarpon Folio holdings on one screen, the system then confirms I want to make those changes across all accounts, allows me to adjust certain thresholds if needed and then it proceeds – all accounts at the same time. All investors receive the exact same pricing on all buys/sells, so there is no separate allocation procedure afterward. FOLIOfn handles it all, and everyone gets a fair shake.

      That make sense? Keep those questions coming…

      Thx.

      Cale

  2. Bo says:

    Cale,

    Thanks for the info on this blog and congratulations on Gecko and Tarpon results. I am considering starting a spoke fund in Texas and have a few questions for you.
    1) Concerning the hub account, I talked with a FolioFN field rep and he was not aware of a way to setup a “hub” account. Is it just a model portfolio or is it actually the manager’s account? And is your hub account in your name or the LLP’s name?
    2) Does the management fee apply to the hub account as well? How do you avoid charging management fee for your own account?
    3) Does the management company or it’s IA representative have to be registered in every state where it has clients?
    4) Are there other required/necessary documents to run a spoke fund beyond those provided by RIA in a Box?

    Thanks for your help. I am quite a newbie and appreciate any guidance you can provide. Thanks again.

    Bo.

    • Cale Cale says:

      Hi Bo,

      Good questions. In quick order, then…

      1. On the FOLIOfn platform, a Spoke Fund is a model portfolio that is synced to the manager’s account quite literally within seconds of creating the model. That way there is no difference between the model and the manager’s account in terms of cost basis, future tweaks, fees, performance measurement, etc. In my case, that account is in my name, and though you’d want to verify the tax effects, there is no reason it couldn’t be in your company’s name. So that “hub” concept probably won’t resonate with FOLIOfn reps yet (working on it!), but it doesn’t need to, either, for you to set things up the way you want.

      That said, been kicking the tires on setting up a Spoke Fund using Interactive Brokers lately, and in that case, it appears the hub there would actually be an account. No real difference from either my or the investors side there than at the FOLIOfn back-end, but my interest was piqued due to lower costs….IB costs appear lower on more accounts. Couple of other things need to be checked out over there, and some IB features are not as user friendly for investors, but I hope to summarize and pass on info at some point.

      2. Yes, all fees apply to the manager’s account(s) as well. I charge myself the same thing I charge all my investors. Right thing to do.

      3. Registration requirements are very much state-to-state. A good rule of thumb is that once you have more than five investors from one specific state, you’ll need to register there as well. Doesn’t work for all states, though. Practically speaking, that may mean you only take on bigger accounts from out-of-state to more quickly recoup the costs of registration there. RIA in a Box can definitely help register wherever you need.

      4. RIA in a Box can also help with all the regulatory and compliance documents you will need to get up and going. (They should be paying me for these plugs!). Highly recommend them. I’ve also used lawyer Todd Schwartz (just started his own firm, Schwartz Law Group) for help on things that I needed definitive answers from a lawyer on, as well…the content of ads, disclaimers, reviewing online materials and a handful of other one-off things basically related to the marketing of spoke funds.

      That said, there are plenty of other documents, spreadsheets, and/or process-related things you’ll need to actually run a fund. I consider all that to be “Operations Manual” material, and while some of that will be specific to your business, there is quite a bit that all Spoke Fund managers using FOLIOfn, for instance, will have in common. Not quite ready to post my manual online yet, but suppose I could be convinced to some day.

      In any case, that’s exactly the sort of thing that makes me think I should have some kind of informal get-together with guys like yourself here in the Keys at some point this spring. Think folks could get a crash course in all of this without having to wait for me and/or my Operations Manual. Love talking about all this, but also gotta keep my primary job front and center. Blowing it all out in a weekend would probably be much more efficient for everyone.

      I will float some ideas about a get-together here on the blog soon. In meantime, hope the above helps. Fire away with any more ?s, eh?

      Thx.

      Cale

  3. Bo Sim says:

    Cale,

    Very helpful indeed. Many thanks.

    Bo.

  4. meiko says:

    hi cale. id say it here – this is revolutionary! i have some few things to ask: 1) how do you deal with the marketing aspect of your fund? 2) im actually planning to set up a fund here in the philippines and will invest in US companies. with regards to structure, i can do an LLP too but im not sure if i can register as RIA. any thoughts on that?

    • Cale Cale says:

      Hi Meiko,

      Will have more to say on marketing soon – talking about it at this weekend’s workshop, then posting notes for all. In general, fine to advertise, since not a hedge fund, but there are things to be aware of nonetheless. And the company’s legal structure is independent of the RIA aspect. You can form the company however you choose. Might be some confusion in that hedge funds are often partnerships or LLPs, but that was just a choice in forming my company that had nothing to do with being a hedge fund. In order to use FOLIOfn as your backend, though, you have to be an RIA, and I suspect the same is true of Interactive Brokers. Don’t think there is any getting around that at this point in time.

      Anyways, hope to put out more soon. Thx for reaching out.

      Cale

  5. meiko says:

    thanks cale. id appreciate your sharing of knowledge at the expense of putting up future competition. hope to see the presentation soon.

  6. Vic says:

    Hi Cale, what do you think of FolioInvesting.com? The folios you have remind me of that website which is pretty cool. Just curious. Vic, Tampa.

    • Cale Smith says:

      Hi Vic,nnYep, Folio is my primary custodian for my Spoke Funds – and for other Spoke Fund managers, too. You can check out the boards on http://www.SpokeFund.com for more. But yes, Folio has been the most important part of putting my funds together…good company, good technology, and good guys.