Same Portfolio, Different Outcomes
Investors today have access to a wide range of investment structures, each with meaningful differences in how they are managed, taxed, priced, and accessed. Choosing the right vehicle is often as consequential as choosing the investment strategy itself. The same underlying portfolio can be wrapped in structures that produce materially different outcomes depending on who is investing and what their goals are.
The key question is not which structure is best in the abstract, but which structure is best suited to a particular investor’s circumstances.
The key question is not which structure is best in the abstract, but which structure is best suited to a particular investor’s circumstances. That determination depends on a set of practical considerations that cut across all investment types. We will introduce many of those considerations and illustrate them through two concrete examples: one in liquid equities and one in private markets.
Key Considerations
When evaluating investment structures, the following dimensions are important to consider:
Tax Efficiency
Different structures create very different tax outcomes. Some vehicles, such as ETFs, are designed to minimize capital gains distributions through in-kind redemption mechanics. Others, such as open-end mutual funds, can distribute taxable gains to investors who have never sold any shares.
Separately managed accounts offer significant flexibility, allowing investors to harvest losses, defer gains, and manage cost basis at the lot level, though the tax benefits depend on individual circumstances.
Partnership structures, such as private equity and hedge funds, pass income and losses through directly but generate complex K-1 reporting and can create unrelated business taxable income (UBTI) issues for tax-exempt investors.
Liquidity
Structures vary significantly in terms of when and how investors can access their capital. At one end, ETFs and mutual funds offer daily or intra-day liquidity. Interval funds and certain evergreen vehicles offer periodic liquidity, typically quarterly, with limits on the amount that can be redeemed at once. Traditional drawdown funds lock up capital for many years, with liquidity available only through secondary-market sales, often at a discount to NAV, or through distributions.
An important principle underlying this spectrum is that investors are often compensated for accepting reduced liquidity. Illiquid structures such as private equity, private credit, and private real assets have historically offered a return premium over their liquid counterparts, reflecting the cost of tying up capital for extended periods. This premium can be meaningful over a full market cycle, but it is not guaranteed; several vintage years over the last few decades have realized lower returns than liquid equivalents.
The trade-off is ultimately between flexibility and return potential: investors who require ready access to their capital should generally expect a concession in returns compared to those willing to commit capital for longer periods.
Valuation & Pricing
How an investment is valued, and how often, varies considerably across structures and has meaningful implications for investors. Publicly traded vehicles such as ETFs and mutual funds are priced daily at NAV or at intraday market prices, providing a transparent and current view of value. For exchange-traded vehicles such as closed-end funds, market prices may diverge from underlying NAV, reflecting investor sentiment and flows as much as asset value.
Private and less-liquid structures introduce a different dynamic. Valuations are typically reported quarterly with a lag, and the process is inherently more subjective. Unlike publicly traded securities, where market prices are readily observable, private asset valuations rely on manager estimates informed by comparable transactions, discounted cash flow models, and third-party appraisals.
As a result, reported values may not fully reflect current market conditions; this can appear to smooth volatility but may also obscure an investment’s true economic value at a given point in time. Investors should therefore view private market valuations as estimates rather than precise measures of realizable value.
Customization
Pooled or commingled vehicles, such as mutual funds, ETFs, and private funds, offer no ability to tailor the underlying portfolio to an individual’s preferences, restrictions, or tax position. Separately managed accounts, by contrast, give the investor direct ownership of underlying securities, enabling bespoke ESG screens, sector exclusions, concentrated position management, and tax-lot level decisions.
Customization typically comes at a cost: SMAs often carry higher minimums and greater operational overhead, particularly when investing in international securities or other less standardized markets. That said, with large pools of capital, SMAs may also offer the opportunity for negotiated fees.
Investor Access & Eligibility
Registered vehicles such as mutual funds and ETFs are broadly available to retail investors. Hedge funds and private equity require investors to meet accreditation or qualified purchaser thresholds. Interval funds and certain registered alternatives occupy a middle ground, offering exposure to less-liquid asset classes within a structure available to a wider investor base. Eligibility requirements can meaningfully narrow or expand the set of options for a given investor.
Fees & Costs
Understanding the all-in cost of ownership, not just the stated expense ratio, is critical.
Fee structures differ substantially across vehicles. Index ETFs and institutional mutual fund share classes often carry expense ratios well below 0.50%. Active mutual funds, hedge funds, and private market strategies carry higher management fees, and alternatives also add performance allocations (traditionally 20% of profits above a hurdle). SMAs charge negotiated flat management fees but layer in custody and administrative costs. Private drawdown funds typically charge management fees on committed capital during the investment period and carried interest on realized gains. Understanding the all-in cost of ownership, not just the stated expense ratio, is critical.
Jurisdiction Considerations
The jurisdiction in which a fund is domiciled, and the tax residence of the investor, can be as consequential as any of the considerations above. For residents of certain countries, investing in offshore vehicles may be difficult, while for others it may provide advantages. Undertakings for Collective Investment in Transferable Securities (UCITS) provide a useful example.
For non-U.S. or cross-border clients, UCITS funds are the dominant European equivalent of registered mutual funds: broadly distributable across jurisdictions, generally daily liquid, and subject to their own regulatory and tax regimes. They are a natural starting point for investors based outside the United States seeking diversified, liquid, regulated exposure.
For U.S. taxable investors, however, the same vehicles carry a significant trap. Most European UCITS funds (and other offshore pooled vehicles) are treated as Passive Foreign Investment Companies (PFICs) under U.S. tax law, which triggers punitive taxation (ordinary-income rates plus an interest charge on deferred gains) unless the investor makes a Qualified Electing Fund (QEF) or mark-to-market election, which itself requires annual information that many funds do not readily provide.
For this reason, U.S. taxable clients generally avoid UCITS and similar offshore funds, while non-U.S. investors, who are not subject to the PFIC regime, often favor them. Matching the fund’s domicile to the investor’s tax residence is therefore an essential step, particularly for clients with cross-border circumstances.
Examples
Example 1: A Liquid Equity Strategy
Consider an investor seeking exposure to a large-cap U.S. equity strategy. The same portfolio can be delivered through three common structures: an exchange-traded fund (ETF), an open-end mutual fund, or a separately managed account (SMA). The right choice depends heavily on the investor.
For many taxable investors, the after-tax advantages generally favor SMAs and ETFs over mutual funds. The SMA’s ability to harvest losses and manage individual lots provides a meaningful advantage that compounds over time. An ETF is a strong second choice given its structural resistance to capital gains distributions. ETFs can also be particularly attractive for investors holding highly appreciated securities.
In certain circumstances, a Section 351 Exchange, whereby appreciated securities are contributed tax-free into an ETF at the fund’s formation in exchange for ETF shares, may allow an investor to transition from a concentrated stock position into a more diversified portfolio without immediately realizing capital gains.
The mutual fund is the least favorable option for taxable investors, as redemptions by other fund holders can create taxable events entirely outside the investor’s control. Of course, some strategies may only be offered through a mutual fund vehicle.
For a tax-exempt investor, such as a pension fund, endowment, or retirement account, the tax advantages of ETFs and SMAs largely disappear. The decision comes down to cost, operational simplicity, and customization needs. In this context, a low-cost institutional mutual fund share class is often competitive, and an SMA may still be justified if the investor has specific mandate requirements, such as proxy voting policies or sector exclusions. An ETF may also be favored where trading flexibility is prioritized.
Example 2: A Private Market Investment
Investors seeking exposure to private markets, whether private equity, venture capital, private credit, or real assets, face an additional layer of structural choice beyond strategy selection. Two common vehicles for accessing private investments are traditional drawdown funds and interval funds. Though they can hold similar underlying assets, they differ substantially in how capital is deployed, how liquidity is managed, and who can access them.
The drawdown fund is the structure of choice for investors optimizing for net return potential and willing to commit capital for an extended period. The fund’s General Partner invests with discipline, deploying capital only when attractive opportunities arise, and the partnership structure aligns manager and investor incentives cleanly around a defined return horizon.
The trade-offs are real: capital is illiquid for years, early returns are suppressed by the J-curve (fees and expenses are paid early on while the fund is still under-invested and typically marked at cost), and operational requirements, including capital calls, K-1s, and UBTI monitoring, demand active attention.
The interval fund often trades some of that return potential and structural efficiency for greater accessibility and periodic liquidity. It is particularly well-suited to investors who want private market exposure but cannot commit to a full drawdown structure, whether due to liquidity constraints, eligibility limitations, or operational preferences. The quarterly repurchase window provides a meaningful improvement over full illiquidity, though investors should understand that redemptions are capped and not guaranteed.
The Situation Should Direct the Decision
There is no universally optimal fund structure. The right vehicle is the one whose characteristics across tax efficiency, liquidity, valuation and pricing, customization, access, fees, and jurisdiction are best matched to a specific investor’s circumstances, goals, and constraints.
As the examples above illustrate, the same investment objective can look very different depending on the vehicle chosen. Tax status alone can reorder an otherwise identical menu of options. A single private markets exposure can be structured to serve an investor who needs periodic liquidity just as easily as one who can commit capital for a decade. The right choice requires careful analysis of the trade-offs involved.
These are not simple decisions. The investment vehicle landscape continues to evolve, with new structures emerging at the intersection of private and public markets, and existing vehicles being adapted to serve a broader range of investors. Navigating these choices well requires both technical knowledge of how each structure operates and an intimate understanding of the investor’s specific situation.
At Silvercrest, we regularly help clients evaluate these trade-offs across both public and private markets. Determining the appropriate investment vehicle is often just as important as selecting the underlying investment itself, as the structure ultimately shapes how taxes, liquidity, fees, and operational considerations affect investor outcomes.
This communication contains the personal opinions, as of the date set forth herein, about the securities, investments and/or economic subjects discussed by Mr. Viscichini. No part of Mr. Viscichini’s compensation was, is or will be related to any specific views contained in these materials. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. © Silvercrest Asset Management Group LLC
