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Closed-End Funds 101

Altidar, Alternative investments for advisors, alternative investment research, Alternative investment analysis, Alternative investment funds, Alternative investment platform, Non-traded REIT analysis, Interval fund analysis, Non-traded BDC analysis, List of interval funds, List of non-traded REITs, List of non-traded BDCs, Non-traded REIT data, Non-traded BDC data, Interval fund data

Non-traded closed-end funds (sometimes referred to as “tender offer funds”) and interval funds are types of closed-end funds that are not listed on an exchange but periodically offer to repurchase a limited percentage of outstanding shares from their shareholders. The principal difference between the two is that an interval fund’s repurchase policy is considered “fundamental,” meaning that it cannot be modified or suspended except in very limited circumstances, while a tender offer fund’s policy is discretionary, and can be modified or suspended at any time.

These funds price their shares daily at net asset value (NAV) and allow investors to sell a portion of their shares back to the fund at NAV. Repurchase offers are made periodically (monthly, quarterly, semi-annually or annually) and offers for interval funds must be made for between 5% and 25% of the fund’s shares outstanding. If repurchase requests received exceed the stated repurchase amount, shares generally will be repurchased on a pro rata basis.

Unlike open-end mutual funds, tender offer and interval funds do not provide daily liquidity. Therefore, portfolio managers can invest their capital in more illiquid assets than they could in mutual funds, as they do not need to be concerned with the need to potentially raise cash on a daily basis to meet redemption requests. This structure gives managers the flexibility to invest in assets or execute investment strategies that may be less liquid and more suited to longer holding periods – assets such as private investment funds, private loans, structured credit, or commercial real estate debt. Investing in illiquid assets may enable the manager to capture an “illiquidity premium.”

Tender offer and interval funds may utilize a wide range of investment strategies, including real estate, corporate credit, and other strategies. Because they are considered to be “investment companies,” they are primarily engaged in the business of investing in securities, which may include listed, non-listed, public, and private securities.

Tender offer and interval funds have a limitation on borrowings which limits their flexibility in using leverage to build their portfolios. They are limited to borrow in amounts up to 33% of total assets or $1.00 of debt for every $3.00 of assets.

These funds are registered under the Investment Company Act of 1940, which provides some investor protections, such as frequent NAV calculations, restrictions on the use of leverage and transactions with affiliates, and custody requirements, governance and oversight requirements.

Factors to consider in evaluating a tender offer or interval fund include the following:

  • Strategy: These funds are “wrappers” that can undertake a wide range of investment strategies. Understanding and evaluating the particular strategy of a fund and its fit in a portfolio is critical.

  • Liquidity: Because an interval fund’s repurchase policy is a fundamental policy, there is greater certainty that it will not be modified or suspended than that of a tender offer fund. It is also important to understand whether the fund has honored all repurchase requests to date or if there have been oversubscriptions and pro-rating.

  • Performance: How has the fund performed to date? Performance is generally measured based upon distributions paid and changes in NAV.

  • Distribution Coverage: Have distributions been fully paid from earnings, or has the fund supported distributions with offering or borrowing proceeds? With some funds it may be appropriate to evaluate coverage based on total return, which can include unrealized gains and losses.

  • Leverage: Borrowing at low interest rates can improve a fund’s overall returns, but debt increases risk, particularly during a market downturn or in an increasing interest rate environment. If a fund is at or close to its regulatory 33% leverage limit, it may have to sell assets to pay off debt if values decline and cause the limit to be exceeded.

  • Fees and Expenses: How do the fund's fees and expenses compare with those of its peer group? If they are higher, are they justified, for example, due to a more complex, management-intensive strategy?

  • Manager Quality: Is the manager an institutional asset manager with a deep organization, or a smaller manager with limited depth and resources? Does the manager have a successful track record in the strategy employed by the fund?

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