Mutual funds and hedge funds that do not accept investments from those who are not already existing investors in such funds. While these funds are closed to new investors, in most cases they may allow existing investors to add to their holdings.
A situation where a fund shuts its doors to new investors is likely to arise when a fund has already attracted large inflows from investors over a period of time, usually due to successful investment performance. As a result, it has probably grown to such a size in terms of assets that the fund managers believe continued outperformance may be increasingly difficult.
The decision to close a fund to new investors is not an easy one to make, since the fund is potentially giving up a significant amount of management fee income. However, the very act of turning away new investors may enhance the attraction of the fund to certain investors, ensuring that it can attract substantial inflows if and when it opens up to new investors. The caveat here is that the fund needs to continue to be an outperformer during the period when it is closed to the public.