Mutual fund company Fidelity Investments manages $1.2 trillion for millions of people. It’s gigantic… and well-regarded.

But you already know this.

What I bet you don’t know is that Fidelity has another fund. Its assets amount to a modest $2.6 billion.

You can’t invest in this fund. I can’t either.

It’s reserved for members of the Johnson family, which controls Fidelity’s parent company, FMR LLC.

And if your last name isn’t Johnson? You can still get into this fund, but only if you’re one of Fidelity’s high-performing fund managers, like Will Danoff or Peter Lynch.

Okay, I’m pretty sure you know Peter Lynch, but do you know who Will Danoff is?

He manages Fidelity’s $109 billion (in assets) Contrafund. Fidelity doesn’t publish or reveal the compensation of its fund managers, but we can assume Danoff makes decent money. He gets a substantial salary, as well as shares in FMR LLC.

But his biggest bonus come from Fidelity’s little-known $2.6 billion fund.

Fidelity’s Little-Known Side Business

So how does this fund reward Danoff?

First, I’ll tell you what it doesn’t do. It doesn’t reward him with shares of Apple, Autodesk, Amgen or Amazon, some of the 268 holdings in Danoff’s Contrafund.

When Fidelity wants to put a smile on its best employees, it doesn’t turn to the public stock market.

Instead, it turns to its little side operation – “its proprietary venture fund” – where it takes big stakes in private companies… like Alibaba… way before regular investors have a shot.

And it rewards its top executives with bargain-priced equity.

Putting a Bow on Alibaba Shares

It’s worked out quite well for Danoff (and others).

This private in-house fund of Fidelity’s, called F-Prime Capital Partners, gifted Danoff 46,154 shares of Alibaba, according to a Reuters investigation. The price per share? Just $0.07.

You see, F-Prime made an investment in Alibaba about 15 years before it went public.

Danoff paid a grand total of $3,432. By the time he received Alibaba’s shares from the fund, it had already gone public at $68 a share.

Danoff’s little allotment was worth $4 million.

Danoff didn’t do anything illegal. But the optics are terrible.

While Fidelity wants you to believe that the best place for you to put your money is in its mutual funds that tap the public markets for its investments, it’s very quietly feeding its own elite employees the most enriching shares it can find.

And they come from the private markets.

That’s simply not fair to its mutual fund shareholders.

You can just hear Danoff saying to his Contrafund shareholders, “Sorry, guys, don’t blame me. Alibaba wasn’t available to you.”

It Gets Worse

Fidelity does invest in startups – increasingly so in recent years. (I’ve seen estimates that calculate 1% to 4% of its assets go into startups.)

For example, it could have invested in Ultragenyx. Mutual fund rival American Funds did. And so did BlackRock. But Fidelity didn’t. Or, more accurately, it couldn’t.

Because F-Prime had already invested – years before the company IPO’d in 2014.

Both can’t invest. That would have violated U.S. securities laws, which prohibit affiliated entities from buying substantial stakes in the same companies at the same time.

By the end of June 2014, F-Prime and a privileged group of Fidelity insiders had pocketed gains of about 1,000%. (Was Danoff one of them? I couldn’t find out one way or the other.)

American Funds and BlackRock did just as well or better.

Fidelity mutual fund shareholders weren’t entirely left out in the cold. Fidelity bought shares of Ultragenyx in the second quarter of 2014. The estimated price for the shares? $41.17 – some 12 times higher than the $3.55 per share paid by F-Prime Capital.

Another example: Adaptimmune Therapeutics. American Funds SmallCap World Fund got in pre-IPO and made a killing. As did… you guessed it… F-Prime. Its early investment in Adaptimmune garnered 5X gains in the weeks following the IPO.

And guess who was late to the party?

That’s right: Fidelity’s Select Biotechnology Portfolio Fund. It bought about 1.5 million Adaptimmune shares shortly after the IPO.

The biotech fund paid at least $14 a share. Adaptimmune and the SmallCap World Fund paid $3.54 for their shares.

F-Prime’s pre-IPO $8 million investment turned into a $41 million windfall. In the meantime, Select Biotechnology Portfolio Fund shareholders lost money. Shares of Adaptimmune are now going for $7.

“What Problem?”

As an early-stage investor, I understand the benefits of investing pre-IPO better than most people. The kinds of gains that Fidelity is awarding its top fund managers through its private fund simply can’t be found in the public markets.

What does Fidelity say about all this? It issued a bold statement…

“When both our proprietary venture capital group and our funds express interest in investing in the same private companies, the funds always prevail.”

Listen, I sympathize with Fidelity… up to a point. But the facts clearly say otherwise.

What it’s doing may not be illegal. But it is unethical and dishonest, and it makes a joke of Fidelity’s mission statement: “The commitment each of us makes… for our customers and put[ting] their interests before our own is a big part of what makes Fidelity special.”

There’s no doubt in my mind that F-Prime competes directly with Fidelity’s mutual funds. And that’s a problem…

A problem that Fidelity says does not exist.

Which, let’s face it, is the much bigger problem.

Invest early and well.