Interval funds are closed-end managed investment companies registered under the Investment Company Act of 1940 that rely on Rule 23c-3 to periodically offer to repurchase shares at NAV from shareholders at predetermined intervals. Tender offer funds are also closed-end funds registered under the ‘40 Act that conduct periodic tender offers on a discretionary basis pursuant to the applicable provisions of the Securities Exchange Act of 1934. Unlike traditional closed-end funds that distribute their shares using an initial public offering, interval funds and tender offer funds continuously offer their shares at a price based on NAV.
These registered closed-end investment companies can be an attractive alternative to open-end mutual funds, ETFs and traditional closed-end funds. Interest in interval funds and tender offer funds has increased for a variety of reasons, including the SEC’s new liquidity risk management program rule and demand for asset classes that are not suitable for open-end funds, which must provide for daily redemption; and a weak market for traditional closed-end fund initial public offerings. Both interval and tender offer funds are required to be in their own, separate trust.
An interval fund may choose either three, six or twelve months as the periodic intervals between repurchase offers. Interval funds must offer to repurchase between 5% and 25% of the fund’s outstanding common stock each periodic interval. The specific amount must be approved by the fund’s directors prior to commencement of the repurchase offer. This provides interval funds with a great deal of flexibility to offer to repurchase. The repurchase offer amount may vary for each repurchase offer.
These structures provide managers with an investment vehicle to deliver exposure to alternative investment strategies and asset classes that are not suitable for open-end funds, all while avoiding some of the problematic features of traditional closed-end funds. The choices between the two structures and the flexibility each provides allow a fund sponsor to customize its investment vehicle in order to optimize its product for investors.
Nottingham can assist in organization of these alternative structures just as we would a traditional open-end fund, and handle all facets of administration. Administration is virtually identical to open-end funds with the exception of the shareholder communications regarding the repurchase periods.