Collective trusts are investment funds that are established by institutional investors. Generally speaking, one will be formed for the purpose of engaging in investment deals that involve a large amount of resources. The idea behind this is to combine the purchasing power of the member institutions so that the investors may engage in financial transactions that would not be feasible individually.
Many different types of institutional investors choose to engage in a collective trust approach to investing. Such high profile investors as mutual fund companies, insurance corporations, pension funds, investment banks, and brokerage houses are all examples of investors who may choose to become part of this type of trust. Doing so often results in larger returns for the institutions, which in turn will benefit the client base for each institutional investor.
There are a couple of benefits associated with being a part of a collective trust. The most obvious has to do with the process of executing investment orders. Because the combination of investors makes it possible to engage in larger deals, the chances for earning a healthy return are increased. Along with the enhanced investment opportunities, a trust often has to deal with less protective regulations than other investors. This is because the perception is that the pool of institutional investors have both the resources and the knowledge combined to adequately protect their best interests.
A collective trust can be an enduring partnership, or be formed among a select group of investors in order to create a temporary investment fund for a specific purpose. The terms and conditions for inclusion in the trust will be defined in the founding documents for the partnership. When the fund is understood to be a temporary arrangement, the documents will also often specify a duration for the partnership, as well as allow for the possibility of the union to evolve into something more permanent after the initial reason for the trust has been fulfilled.