Special Funds: Let Us Be Careful!

1. Some investment funds are legitimate and professionally managed, while others may present significant risks. Investors must therefore undertake proper due diligence before committing their money.
2. There is no universally recognized asset class known as a “special fund.” The term does not, by itself, tell an investor what assets the fund holds or how its returns are generated.
3. The designation can be misleading to an ordinary investor because the word “special” suggests that the product is inherently superior, exclusive, or more attractive than an ordinary investment fund. That impression may not reflect the fund’s actual risk profile.
4. In many cases, investors primarily hear two things: that the fund is “special” and that it offers unusually high returns. Yet many investors may be unable to explain the underlying investments, the risks involved, or how the advertised returns are generated.
5. Consistently generating returns of approximately 25% per annum is difficult, particularly where the structure is also expected to pay substantial commissions to agents or intermediaries. Such returns should therefore attract enhanced scrutiny, detailed disclosure, and independent verification.
6. The first reform should be proper classification and naming. Funds should be described according to their actual investment mandates—for example, debt funds, equity funds, private credit funds, infrastructure funds, commodity funds, or multi-asset funds.
7. The second and most important reform is disclosure. The Capital Markets Authority should require all collective investment funds, including special funds, to publish sufficiently detailed portfolio disclosures every quarter. Investors should be able to identify the assets held, assess concentration and related-party risks, and independently evaluate whether reported performance is consistent with the underlying portfolio.
8. Regulatory inspections alone may not provide adequate market confidence. There should be stronger institutional safeguards, including independent custody, independent valuation, external audit, transparent performance calculations, and meaningful sanctions for inaccurate reporting.
9. Greater visibility is in the long-term interest of the financial services sector. If funds are growing rapidly on the strength of unusually high reported returns, regulators, investors, and the media should distinguish among:

• genuine new investor inflows;
• realised investment income;
• legitimate asset-value appreciation; and
• accounting, valuation, or back-office adjustments.

10. For example, a KSh10 billion fund reporting annual growth of 25% would rise to KSh12.5 billion even without receiving any new investor money. Rapid growth figures should therefore not be celebrated without examining precisely how that growth was generated.

11. The sector requires a transparent and technically informed discussion involving regulators, fund managers, trustees, custodians, auditors, investment professionals, and investor representatives. The objective should not be to condemn every special fund but to ensure that every fund is accurately named, transparently managed, and capable of substantiating its reported performance.

The ultimate principle is simple: investors should not be asked to invest because a fund is called “special.” They should invest only after understanding what the fund owns, how it earns its returns, what risks it assumes, and whether its reported performance can be independently verified.