How Interval Funds Compare with Traditional Closed-End Funds
December 7, 2017 | Beth Glavosek | Blue Vault
Last week, we looked at the similarities between closed-end interval funds and mutual funds. Like mutual funds, interval funds offer the transparency, regular valuations, and investor protection elements of the 1940 Act.
As a recap, both interval funds and mutual funds offer shares continuously that are priced daily based on net asset value (NAV). While open-end mutual funds can be redeemed daily, interval funds offer redemptions, as the name implies, at specific intervals such as quarterly or monthly.
So, what are closed-end funds, and how are they similar and different from interval funds? Closed-end funds first became available in 1893, 30 years before open-ended mutual funds were created. Brought under federal regulation by the 1933 Securities Act, closed-end fund rules were further formalized under the Investment Company Act of 1940. Unlike open-ended funds, closed-end funds have a fixed number of shares to sell. Once the initial public offering is complete, shares may be bought and sold on public exchanges (like the NYSE). Share pricing may be above or below actual underlying NAV, depending upon market demand.
Similarities Between Closed-End Funds and Interval Funds
- Allocations to illiquid holdings. Both closed-end funds and interval funds may allocate in unlimited amounts to illiquid assets.
- Daily valuations. Unlike some unlisted securities that don’t provide more frequent valuations, both of these offer transparency through daily pricing.
- Unrestricted access to both private and public investments. Open-ended funds are only allowed limited access to private investments, whereas closed-end funds and interval funds may allocate freely to private investments.
Differences Between Closed-End Funds and Interval Funds
- Offering of shares. Interval funds make a continuous offering of shares, while closed-end funds offer shares one time through an initial public offering (IPO).
- Exchange trading and pricing. Interval funds sell their shares directly to the public with direct redemptions available at NAV. Closed-end fund shares may be bought and sold on an exchange only at market pricing that may be more or less than NAV.
- Frequency of redemptions. Closed-end fund holders may buy and sell shares at any time based on trading volume. Interval funds usually restrict redemptions typically to quarterly intervals.
In upcoming posts, we’ll continue to look more closely at interval funds and what they have to offer.
Best Due Diligence meeting in the industry. No sales pitches, senior level decision makers, meaningful discussions and the Broker Dealer networking sessions were especially useful. Thanks to Blue Vault for raising the bar!