Securitisation vs traditional investment funds

A key ingredient of Securitisations is that they are managed "passively". This means that once the Securitisation has made its investments into the underlying assets, it should not make adjustments unless it is for administering the financial flows of the Securitisation itself (e.g. for liquidity management) or unless it is making the adjustment on a defensive or prudent basis. The Securitisation should not be looking out for better opportunities, rather it is permitted to exit from investments which are in danger of underperforming and replace them with equivalent alternatives. This "passive" management is not compatible with making frequent changes to the underlying investment composition, or with actively searching for or developing new investment opportunities, i.e. it is not at all like a hedge fund or a private equity fund. It is suitable for investors who are happy to remain invested in the same underlying asset or set of assets for the whole term of their investment as long as those assets are performing at least more or less as they expected.

On the other hand, the Securitisation's manager has a certain amount of discretion in deciding when an underlying asset needs to be exchanged, and what constitutes an appropriate replacement.

The replacement should be similar in terms of asset set or sector, and risk profile, it being noted on the other hand that the terms and conditions of the Securitisation can describe the asset set or sector in quite a broad way (e.g. 'European real estate debt', or 'green energy').

"Passive" management means Securitisations are less risky than funds. In connection with them being lower risk investments, Securitisations usually do not need to be supervised by (or prepare detailed reports for) financial regulators. Being unregulated makes Securitisations much less expensive to set up and run.

It should be noted that as of quite recently Securitisations can be "actively" managed, provided they invest only in debt instruments (e.g. loans or debt securities), it being noted that debt is generally considered lower risk than equity (because debtors generally get paid in priority to shareholders if a business goes bankrupt, and on the other side of the coin the potential upside from investing in shares is generally higher than the potential upside from providing loans).