When someone starts tracking a new investment vehicle, it’s usually because the category is catching on and no one else is tracking it. That’s what spurred Jacob Mohs to create the Interval Fund Tracker this year. The Interval Fund space is still relatively small, with only $17 billion in assets under management as of the third quarter of 2017, but Jacob was intrigued. “It’s an interesting space that’s accelerating, and I saw a gap that other data providers were not filling,” Jacob told my colleague.
Don’t be surprised if you’ve never heard of an interval fund or its “sibling,” the tender-offer fund. They both belong to the family of so-called unlisted closed-end funds, and while they’ve been around since 1993, unlisted closed-end funds have not made much of a splash until recently.
Their growing popularity can be traced to the never-ending search for higher and uncorrelated returns. But it can also be tied to tapping the so-called “mass affluent” retail market and arguably, to academic work by the behavioral economist and recent Nobel Laureate Richard Thaler who argues that we aren’t rational consumers, after all.
In 1992, the SEC published a landmark study recommending the industry to “chart new territory between the two extremes of the open-end and closed-end forms of investment funds.” In other words, explore the possibilities that lie between highly liquid mutual funds and illiquid closed-end funds.
Interval and tender-offer funds were created to meet that challenge. Unlike traditional closed-end funds, interval and tender-offer funds do not currently trade on the secondary market. Instead, interval funds offer to repurchase 5-25% of their shares at net asset value at certain intervals — it could be every three, six, or 12 months. Tender-offer funds also offer to repurchase shares, but at times set by the fund’s trustees.
This “not too hot, not too cold” liquidity feature was designed to appeal to investors who aren’t super wealthy and want access to potentially higher returns that illiquid investments can deliver without the long lock-ups, capital calls, K-1 tax forms or the high minimums typically required by alternative investments. About two-thirds of interval funds have an investment minimum of $10,000 or less, while about half of tender-offer funds have $50,000 or lower minimums, according to an industry report.