Fund sponsors are increasingly considering two similar types of registered closed-end investment companies known as “interval funds” and “tender offer funds” as an attractive alternative to open-end mutual funds, exchange-traded funds (“ETFs”) and traditional closed-end funds. Interest in interval funds and tender offer funds has increased for a variety of reasons, including the Securities and Exchange Commission’s (the “SEC”) liquidity risk management program rule; 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. More recently, interval and tender offer funds have served the role as a testing laboratory for new asset classes such as digital asset futures, fine art, and secondary market interests in private funds, allowing regulators and asset managers alike the chance to observe strategies in a more controlled wrapper. At the same time, hedge fund and other private fund managers seeking to expand their pool of available investors have discovered that interval funds and tender offer funds may serve as vehicles for certain alternative investment strategies that would not be suitable in other registered investment company structures. Concerns regarding new compliance obligations for private funds and their managers and their related expenses may have shifted the economic calculus as to whether a private or registered fund wrapper is best for a particular investment strategy.
Interval funds are closed-end managed investment companies (“closed-end funds”) registered under the Investment Company Act of 1940 (the “1940 Act”) that rely on Rule 23c-3 under the 1940 Act to periodically offer to repurchase shares at their net asset value (“NAV”) from shareholders5 at predetermined intervals. Tender offer funds, on the other hand, are closed-end funds registered under the 1940 Act that conduct periodic tender offers on a discretionary basis pursuant to the applicable provisions of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules thereunder. Unlike traditional closed-end funds that typically distribute their shares using an initial public offering, interval funds and tender offer funds continuously offer their shares at a price based on NAV.
This white paper provides a summary of the interval fund and tender offer fund structures, including their basic legal framework, their investment restrictions, how they are distributed and how they facilitate redemptions. It also provides a comparison of interval funds and tender offer funds, both to each other and to other types of investment companies. A table comparing the general characteristics of interval funds, closed-end funds and other types of investment vehicles is included as Appendix I to this document.