The History of Investment Funds: From Amsterdam in 1774 to the Money Market Fund on Your Phone

Series note: This is Article 1 of a three-part series on the history of investment funds and collective investment schemes. Article 1 traces the global history of investment funds and their legal origins. Article 2 turns to the Kenyan context, the Capital Markets Act, the Capital Markets (Collective Investment Schemes) Regulations, 2023, the types of funds and the size of the market. Article 3 examines Special Funds.

When a Kenyan opens a money market fund on M-Pesa with as little as KES 100, watches the balance earn interest each day, and withdraws it back to M-Pesa whenever it is needed, it feels like a very modern thing. It is powered by a smartphone, a USSD code and the settlement rails of a telecommunications company.

Yet the idea underneath it is not modern at all. That saver is doing exactly what a small group of Amsterdammers set out to do in 1774: pooling money with strangers so that, together, they could own a spread of investments none of them could have afforded alone, and trusting a set of rules and named officials to keep the pooled money safe. The technology is new but the legal architecture behind today’s collective investment schemes is two and a half centuries old.

This article, the first in a series of three, traces the history of investment funds from their origins to the present. My interest here is not returns or investment tips. It is the law: the structures I recognise, the fiduciary duties, the trust deeds and custody arrangements that our banking and finance practice advises on daily, and above all the pattern by which almost every important rule of fund law was written in the aftermath of a failure. Understanding that pattern is the best possible preparation for the Kenyan questions this series will take up in Articles 2 and 3.

The Dutch invention in Amsterdam, 1774: where the history of investment funds begins

The first pooled investment fund recognisable to a lawyer like myself was launched in Amsterdam in 1774 by a broker named Abraham van Ketwich. He called it Eendragt Maakt Magt, meaning Unity Creates Strength, the maxim of the Dutch Republic. It arrived in the wake of the credit crisis of 1772 to 1773, a panic that began in London and spread to Amsterdam, leaving investors wary of concentrated bets.

Van Ketwich’s response was a structure rather than a stock tip: a closed-end fund of a fixed number of negotiable participation certificates, whose proceeds were invested across a deliberately diversified portfolio of bonds issued by foreign governments and banks, together with plantation loans in the West Indies. The whole point, in the words of financial historian K. Geert Rouwenhorst of Yale, whose 2004 study “The Origins of Mutual Funds” remains the authoritative account of this early history of investment funds, was to provide “small investors with limited means an opportunity to diversify“, to obtain, in portions of 500 guilders, a spread of holdings that only the wealthy could otherwise assemble.

What makes van Ketwich interesting to me is that he did not merely gather money but also built in governance. He appointed commissioners to manage the fund and kept the administration separate from them, so that no single person could both decide and hold.

The physical securities were stored, in Rouwenhorst’s words, in “an iron chest with three differently working locks“, the keys to which were held by the commissioners and a notary public, so that the box could not be opened, and the assets could not be touched, unless several independent people acted together.

The management fee was strikingly modest. Rouwenhorst calculates the ongoing annual charge at “0.2 percent of assets, which is low even by modern standards“. The fund was designed to be conservative and to pay out over time rather than trade aggressively. It was not a commercial triumph, as the Fourth Anglo-Dutch War and the upheavals of the French period battered its holdings, and it was finally wound up in 1824 when, as Rouwenhorst records, “a liquidating dividend of 561 guilders was paid to the remaining participants“. But the template survived the fund: pooling, diversification, negotiable units, a modest fee, and a deliberate separation between the people who decide and the people who hold the assets. Two hundred and fifty years later, that separation is still the backbone of fund law, including Kenya’s.

To Britain, where the trust and the phrase that defined an industry were born

The idea travelled to Britain, and there acquired the legal form that Kenya would eventually inherit. On 19 March 1868, the Foreign & Colonial Government Trust was launched in London. It is generally regarded as the oldest surviving collective investment scheme in the world, and today it still trades as F&C Investment Trust, a constituent of the FTSE 100.

It was founded by Philip Rose, a lawyer who had become financial adviser to Benjamin Disraeli, and its first prospectus contained the sentence that has justified the entire industry ever since. Its stated object was “to give the investor of moderate means the same advantages as the large Capitalists, in diminishing the risk of investing in Foreign and Colonial Government Stocks, by spreading the investment over several different Stocks, and reserving a portion of the interest as a Sinking Fund to pay off the original capital”. That is the democratic promise of pooling, set down in Victorian prose. Risk spreading, once the privilege of the rich, was offered to ordinary savers.

The model spread quickly to Scotland, where Robert Fleming launched the Scottish American Investment Trust in Dundee in early 1873 to channel Scottish savings into American railroad bonds. These were investment trusts, that is, companies whose shares you bought, a closed-end corporate form.

The other great British contribution, and the one that matters most for Kenya, came later. In 1931 the Municipal & General Securities Company (which became M&G) launched the First British Fixed Trust, the first unit trust in Britain, holding the shares of 24 leading companies. Its innovation was legal: rather than a company, it used the machinery of the English trust. A trust deed, a fund manager who made the investment decisions, and an independent trustee who held the assets on behalf of the unit holders. This trust structure, manager plus trustee, with the beneficiaries’ assets legally separated from the manager’s own, is the direct legal ancestor of the Kenyan unit trust. Kenya received English trust law, and when Kenyan collective investment schemes are built today they are built on this 1931 template.

To America, the open-end fund, and the law that followed a crash

Across the Atlantic the story turned on a different structural insight and then on a catastrophe. On 21 March 1924 the Massachusetts Investors Trust was established in Boston. This was the first open-end mutual fund, offering redeemable shares that an investor could buy from, or sell back to, the fund at net asset value.

The distinction between this open-end form and the older closed-end fund is not a technicality but the difference between a fund that must always stand ready to redeem and one whose shares merely trade on a market. That difference would later become the fault line in some of the industry’s worst failures.

Then came 1929. The crash devastated the highly leveraged closed-end funds of the 1920s, many of them opaque, self-dealing and stacked with debt. The open-end structure, holding liquid securities and redeeming at net asset value, largely survived.

The political response built the foundations of modern securities law: the Securities Act of 1933, which forced disclosure on those selling securities to the public; the Securities Exchange Act of 1934, which created the Securities and Exchange Commission; and, most important for funds, the Investment Company Act of 1940, which for the first time defined what a fund was and imposed rules on disclosure, custody of assets, governance and the fiduciary conduct of those managing other people’s money. The legal lesson is the one that runs through this whole series: fund regulation around the world descends from responses to crisis. The law did not arrive first and tidy the market. The market failed, savers were hurt, and the law followed.

Why pool at all, and the principles beneath the structures

Strip away the history of investment funds, and the case for pooling comes down to four plain advantages, all of which a small saver enjoys and could not otherwise obtain. Diversification spreads risk across many holdings, so that one failure does not sink the saver, the very thing van Ketwich was selling in 1774. Professional management puts decisions in the hands of people who do this for a living. Economies of scale bring down the per-shilling cost of dealing and administration. And liquidity, in an open-end fund, lets the saver get money out at a fair value rather than being trapped.

The intuition that diversification reduces risk without necessarily reducing return was given rigorous mathematical form in 1952, when Harry Markowitz published “Portfolio Selection” in the Journal of Finance and founded what became Modern Portfolio Theory.

A generation later the logic was pushed to its conclusion by John Bogle, who on 31 August 1976 launched the First Index Investment Trust, the first index fund for ordinary investors, which simply tracked the market at very low cost rather than trying to beat it. Ridiculed at the time as “Bogle’s Folly” and raising only about $11.3 million against a target of as much as $150 million, it became one of the most influential ideas in modern finance and the foundation of the low-cost passive movement.

But the deepest principle for me is none of these. It is the fiduciary principle. A fund is, by definition, other people’s money in someone else’s hands.

That single fact is why fund law everywhere insists on the same protective furniture: trustees who hold the assets, custodians who keep them, disclosure documents that tell savers what they are buying, and independent oversight of the manager.

The straight line here is worth naming. Van Ketwich’s chest with three locks, which could not be opened by one hand alone, is the same idea as the modern separation of the fund manager (who decides), the trustee (who holds the assets in trust for investors) and the custodian (who has physical and legal safekeeping of them). The technology changed but the control did not.

When funds fail, and the lessons that keep being relearned

Because the law follows failure, it is worth naming two modern failures that this series will return to, because each taught a lesson that Kenyan savers and their advisers should hold onto.

The first is the money market fund. Money market funds are marketed, correctly, as low risk, but low risk is no risk.

On 16 September 2008, days after Lehman Brothers collapsed, the Reserve Primary Fund in the United States, then the world’s third largest money market fund with roughly $62.5 billion in assets, “broke the buck“. Holding $785 million of Lehman commercial paper, it wrote that paper down to zero; its net asset value fell to $0.97, and a fund that savers had treated as equivalent to cash suddenly was not.

According to the Yale Journal of Financial Crises, the panic became “a $439 billion run on the MMF market“, which prompted the US Department of the Treasury to announce its Temporary Guarantee Program for Money Market Funds on 19 September 2008 to stop the run spreading. The lesson that is permanent is that a money market fund is a security, not a bank deposit, and it carries risk even when that risk is small.

The second failure is about liquidity. In Britain, the LF Woodford Equity Income Fund, an open-end fund that promised investors they could deal daily, was suspended on 3 June 2019, a suspension triggered when Kent County Council sought to redeem a stake reported at £263 million and the fund could not raise the cash.

The Financial Conduct Authority later found that at the time of suspension only 8% of the investments held by the fund could be sold within 7 days, whereas under the rules then in place investors should have been able to access their funds within 4 days. More than 300,000 retail investors were trapped in a fund whose value had already fallen from a peak of over £10.1 billion in May 2017 to roughly £3.6 billion by suspension, and it was ultimately wound up.

The lesson that is structural is that an open-end fund offering daily redemption must hold assets it can actually sell daily, or the promise of liquidity is a fiction. Both episodes will reappear in this series, because both map directly onto risks that exist in the Kenyan market.

The modern vocabulary of closed-end, open-end, trust and company

Two structural distinctions run through everything above and will recur throughout this series. The first is closed-end versus open-end. A closed-end fund issues a fixed number of units or shares that then trade among investors. It need not redeem, and its price can drift from the value of its underlying assets. This was the form of van Ketwich’s fund, of F&C and of the Scottish trusts.

An open-end fund continuously issues and redeems at net asset value. This is the form of the Massachusetts Investors Trust, of the British unit trust and of the money market fund you withdraw using M-Pesa.

The second distinction is unit trust versus investment company. The first holds assets on trust, with a trust deed, a manager and a trustee. The second is a company whose shares you own, governed by company law and a board. These are not interchangeable labels. They determine who owes duties to whom, how investors are protected, and what happens when things go wrong, which is precisely why they matter in law.

In Europe, this body of thinking was consolidated into what is now the global benchmark for retail fund regulation, the UCITS framework, first adopted by the European Community in 1985 and refined repeatedly since. It is widely treated as a gold standard for investor protection, so much so that, as the international law firm Curtis Mallet-Prevost has observed, “the UCITS brand’s recognition has rapidly evolved into a benchmark for international excellence“, because it combines strict diversification and liquidity rules with a robust custody and disclosure regime. Kenya’s own framework for collective investment schemes, as my next article will show, sits recognisably within this global family.

What comes next, the Kenyan questions

Kenya’s unit trust is a direct descendant of the English trust and of that 1931 British unit trust, and the Capital Markets (Collective Investment Schemes) Regulations, 2023 carry forward the same tripartite protection that van Ketwich reached for with his three locked chests: a fund manager who decides, a trustee who holds the assets in trust for investors, and a custodian who safeguards them. Our banking and finance practice advises fund managers and trustees on exactly this structure. That is the thread this series on the history of investment funds follows from Amsterdam to Nairobi.

Article 2 will answer the questions this history raises for a Kenyan reader.

1. What does Kenyan law say about who may lawfully pool money from the public, and what makes doing so without authorisation an offence?
2. How are unit trusts structured under the Capital Markets Act and the Capital Markets (Collective Investment Schemes) Regulations, 2023, and what precisely are the duties of the fund manager, the trustee and the custodian?
3. What types of collective investment scheme exist in Kenya, being money market, fixed income, equity, balanced and special funds, and how large has the market become?
4. How does an ordinary saver tell a regulated fund from an unregulated product dressed up to look like one?

Article 3 will then examine Special Funds in detail.

Follow this series on the history of investment funds at www.pmlaw.co.ke/insights, where the next article takes this 250-year-old idea and asks what Kenyan law actually does with it. If you need advice now on setting up or licensing a fund, get in touch with our team.

Peter Maina is one of the leading capital markets lawyers in Kenya. He has advised fund managers, trustees, custodians and investors on the setting up, licensing and governance of fund managers, the approval and structuring of collective investment schemes and special funds, and regulatory engagement with the Capital Markets Authority.

This article states the position as at July 2026. It is for information purposes only and is not a legal opinion; talk to a lawyer for that. Should you need assistance or advice relating to capital markets, collective investment schemes and special funds or any related matters, reach out via e-mail or WhatsApp on +254 714 644 080.