Commingling is the act of combining separate assets into one financial entity, of which the asset holders then own a proportional share. The most common example of commingling is in the case of mutual funds, where investors pool their personal resources into one shared fund that trades securities on their behalf according to an agreed-upon investing framework or set of strategies.

The Logic of Commingling

Investors use commingling to create shared funds so that they can more effectively invest using the advantages of a larger pool of resources. Some examples of the advantages of trading with a larger pool of resources are lower commissions and fees, the ability to use block trades and access to exclusive offerings and security classes.

By leveraging these and other advantages, commingled funds, such as hedge funds and mutual funds, aim to generate a greater rate of return on each investor’s proportional share of the commingled fund than they would earn on the same amount as independent investors.

The Limits of Commingling

Despite the strong advantages of pooling resources, commingling is not without its drawbacks as well.

Commingled funds require either term limits for deposits or the holding of a significant amount of cash on hand to meet redemptions from the fund, or both in some cases. Term deposits mean that investors have limits set upon when and how much of their assets they can withdraw from the shared fund. The requirement of holding cash on hand for redemptions means that the returns on this portion of the fund will be limited.

Commingling also often requires a limiting set of agreed-upon investing frameworks or strategies that can lead to lower returns from the fund. Investors in the fund may have preferences in terms of time horizons, asset classes or even ethical factors that will limit the operation of the fund and the potential rate of return on investments.

Furthermore, once these limitations are set, the commingling structure rarely offers quick and effective mechanisms for adjusting any of the fund’s limitations.

Commingling and Trading

For a day trader commingled funds represent an excellent opportunity to profit from the limitations that these funds operate under. From the need to close out positions during redemption periods to the forced trades resulting from strict trading strategies or guidelines, commingled funds often make trades that ‘leave money on the table’, which day traders are expertly positioned to take advantage of.

Understanding the limitations set upon the various types of commingled funds in the marketplace, from hedge funds to mutual funds, allows day traders to take advantage of their own small size and comparatively nimble trading strategies.

Final Thoughts

Commingling shapes much of the activity in contemporary markets. The desire to take advantage of a larger resource pool in trading also leads to a variety of limitations that larger resource pools face when trading. Understanding the effect of commingling on contemporary markets offers a number of opportunities for traders to profit from their relatively smaller size and capacity for more flexible trading strategies.