Carve Out

Could someone explain to me the simple concept of a carve out and when it’s allowed?

I feel like I’m making it way more difficult than it really is but I don’t understand the advantages of using one. Is it like saying X composite returned 3% but that Y carve out that makes up a portion of the X composite returned 15%?

Carve-out is only allowed if it is managed separately with its own cash balance. That’s pretty much my entire understanding of that particular matter lol

Same. Perhaps someone can provide a short and sweet explanation here.

Not sure to perfectly understand the concept either but this is how I interpret it.

I think the advantage is to promote a sub-strategy.

For example a client want to invest in US-Equities but wants 20% in the pharma sector.

If the overall performance for this client portfolio is 10% but 30% on the pharma sector, it can be interesting to add this "carve out " portion in another composite called “pharma sector” (along with other portfolios invested in the similar sub-strategy).

Then one can propose this sub-strategy to potential clients using the computed return on this sub-strategy for advertisement purpose

However, as stated above, it is required that the carve-out portion was managed separately with its own cash balance.

If you look at a balance fund or a target date fund or a multi asset fund. They are made up of multiple asset classes. GMO is a fund manager who basically has a multi asset fund that buys into each of the equity, fixed, inflation funds and that’s how they compose their “Balance” fund. Because each asset class is a separate fund with it’s own assets and cash account. They can spin off sections to a different composite, for example they can take their equity portion and create a new composite.

Now if you look at standard life multi asset. They don’t create a seperate funds or accounts in their multi asset product. They use one account to buy into all the different assets classes. So lateron if they want to create a seperate equity composite like GMO, they won’t be able to spin it off because all the money is all mixed together. Think of this as interbreeding and it’s a nono. GIPS does not like interbreeding and also why balanced funds aren’t considered an asset class.

However there is a Peer Universe for it because there is a large demand for alternative assets. blah blah blah.

I take it you’re from Boston

Nope, they just so happen to be the only fund manager I know who structure there funds that way lol