The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to provide investors information about interval funds. Interval funds are legally classified as closed-end funds, a type of investment company, but they have some distinctive features that make them different from typical closed-end funds.
Some important features of interval funds are:
- Offering/Repurchase Process: While many closed-end funds generally sell all of their shares in a public offering, then trade on an exchange, interval funds continuously or periodically offer their shares at a price based on the fund’s net asset value (NAV). Most interval funds’ shares do not trade on a national securities exchange like typical closed-end fund shares do. Instead, interval funds buy back, or “repurchase” shares directly from shareholders. But, interval funds offer to repurchase shares only periodically (often quarterly). And when they do repurchase shares, they only repurchase a limited percent of all outstanding shares. This feature may substantially limit a shareholder’s ability to liquidate their investment.
- Investment Opportunities: Because shareholders can only sell back their interval fund shares at certain times, interval fund managers do not have the same concerns about constant redemptions as open-end fund managers do, and do not have to manage the fund to take into account the possibility of unplanned redemptions. This may give interval fund managers more flexibility to invest in less liquid assets, such as private companies, derivatives, or certain debt instruments. Investing in a wider range of assets can be a good tool for portfolio diversification and may mean that an interval fund follows movements of the stock market less closely. In some cases, an interval fund may give individual investors the opportunity to invest indirectly in assets that would usually only be available to institutional investors. However, investing in less liquid assets could increase risks because it may be hard for interval funds to sell these investments or they may need to be sold at a discount.
- Returns: As with any investment, you could lose money investing in an interval fund. An interval fund’s greater flexibility to invest in different types of assets can potentially lead to higher returns but such investments can also increase risks. There is no guarantee that an interval fund will have better or different returns than other fund types.
How are interval fund shares repurchased?
There are restrictions on how and when an interval fund will repurchase your shares. An interval fund will periodically offer to buy shares back from shareholders, known as making a “repurchase offer.” Repurchase offers are generally made every three, six, or twelve months, as disclosed in the fund’s prospectus and annual shareholder report. The interval fund also will periodically notify its shareholders of the upcoming repurchase dates. When the fund makes a repurchase offer to its shareholders, it will specify a date by which shareholders must accept the offer. The actual repurchase will occur at a later, specified date.
- What this means for you: You will not be able to sell your fund shares whenever you want. You must wait for the next repurchase offer, which could be as long as twelve months away. Your money may be locked up in the fund, even in the event of a market downturn.
Interval funds will only buy back a certain percent—5% to 25%—of all outstanding shares during a repurchase offer. If shareholder requests for repurchase exceed the amount of outstanding shares eligible for repurchase during a repurchase offer, repurchase is generally done on a pro rata basis.
- What this means for you: You may actually only be able to sell a certain percentage of the shares you request to have repurchased. In other words, there is no guarantee that you can sell the number of shares you want in response to a given repurchase offer by the fund.
Shareholders are not required to accept a repurchase offer to sell their shares back to the fund. Shareholders who do not accept a repurchase offer generally must continue to hold their shares until the next repurchase offer.
Here is how the process for selling interval fund shares compares to several other common fund types:
|Once a day at close of business at NAV from fund
|Intraday at market prices on a national securities exchange
|Exchange-Traded Closed-End Funds
|Intraday at market prices on a national securities exchange
|Every three, six, or twelve months at NAV from fund
The price that shareholders will receive on a repurchase will be determined as of a specified (and disclosed) date. This date will occur sometime after the close of business on the date that shareholders must submit their acceptances of the repurchase offer (but generally not more than 14 days after the acceptance date).
- What this means for you: You will not know the exact price you will receive for selling your shares at the time you decide to accept the repurchase offer.
What fees and expenses will I pay for an interval fund?
Interval funds can have many of the same types of fees and expenses as other investment companies, such as sales loads, repurchase fees, and management fees. The fund’s fees and expenses will be detailed in its prospectus fee table.
In some cases, an interval fund’s fees and expenses may be higher than those charged by other types of funds. For example, some interval funds charge higher management fees that may be used to hire managers with experience investing in certain types of assets (for example, less liquid assets that interval funds can hold). Sometimes the assets that interval funds invest in also come with a higher cost of investing, and these costs are passed along to shareholders. Interval funds sometimes deduct a fee from the repurchase proceeds, not to exceed 2% of the proceeds, which is generally intended to compensate the fund for expenses directly related to the repurchase. Always be sure you understand the fees and expenses of any fund before investing.
Before You Invest in an Interval Fund
- Carefully read all of the fund’s available information, including its prospectus and most recent shareholder report. You can get this information by looking at the fund’s filings on the SEC’s EDGAR database, from your investment professional, or directly from the fund.
- Make sure that you are okay with having your money tied up until the fund’s next repurchase offer (and with possibly only being able to get back a limited portion of your money at that time).
- Understand the fees and expenses you will pay for the fund, and compare them to the costs for other investment options.
- Be sure that the fund’s investment strategy is consistent with your goals.
Investor Bulletin: How to Read a Mutual Fund Prospectus (Part 1 of 3: Investment Objective, Strategies, and Risks); (Part 2 of 3: Fee Table and Performance); (Part 3 of 3: Management, Shareholder Information, and Statement of Additional Information)