An Interval Fund may be best described as a Closed-End Fund with some of the attributes of an Open-End Fund. Some sponsors are selling them in lieu of non-traded BDCs and REITs because they are viewed to be more investor friendly as sponsors look to address FINRA notice 15-02 and the new DOL fiduciary rule. Let’s define some terms:
“Closed-End Fund” — A traditional closed-end fund is a publicly traded investment company that raises a fixed amount of capital, only one time, through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
“Open-End Fund” — An open-end fund is a type of mutual fund that does not have restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell. The price of purchases and sales are based on the fund’s net asset value, which is a great benefit to investors.
“Interval Fund” — An interval fund is legally classified as a closed-end fund, however it is different from a traditional closed-end fund. An interval fund offers daily investments but only a stated portion of its shares are available for sale or redemption during pre-determined intervals. Similar to the open-end structure, purchases and sales are made at the fund’s net asset value (NAV).
“Non-Traded Fund” — A non-traded fund, such as a non-traded BDC or non-traded REIT, is a continuously offered fund that does not trade on a securities exchange. Non-traded funds can be illiquid for long periods of time and offer limited redemptions. Investors typically seek non-traded funds as a long-term investment for income distribution.
In summary, an interval fund acts like a cross between an open-end and closed-end fund. Interval funds offer investors the option to invest daily, while they only allow for periodic redemptions (typically quarterly), through the fund’s repurchase offer program. Offering periodic redemptions rather than daily redemptions gives the fund the opportunity to invest in assets that may be considered more illiquid in nature and higher risk, and therefore more suitable to long-term investors. Unlike a non-traded fund, interval funds must offer at least 5% at each quarterly redemption.
The views and opinions expressed herein are for informational purposes only as of the date of this material and are subject to change at any time. This material is not a recommendation, offer or solicitation to buy or sell any securities or engage in any particular investment strategy and should not be considered specific legal, investment or tax advice. Reliance upon this information is at the sole discretion of the reader. Before investing in a fund, you should read the fund’s prospectus carefully.
Closed-End Fund Structure. Closed-end funds differ from open-end management investment companies (commonly referred to as mutual funds) in that closed-end funds do not typically redeem their shares at the option of the shareholder. Rather, closed-end fund shares typically trade in the secondary market via a stock exchange. Unlike many closed-end funds, however, an interval fund’s shares are not typically listed on a stock exchange. Instead, interval funds will provide limited liquidity to shareholders by offering to repurchase a limited amount of shares on an interval basis (typically quarterly) – more information on this can be found in a fund’s prospectus. An investment in interval funds is suitable only for investors who can bear the risks associated with the limited liquidity of the shares and should be viewed as a long-term investment.
Repurchases of Shares. Interval funds typically make quarterly repurchase offers but there is no guarantee that shareholders will be able to sell all of the shares they desire in a quarterly repurchase offer because shareholders, in total, may exceed the Fund’s maximum tender offer set by the Fund. If the amount of repurchase requests exceeds the number of shares the Fund offers to repurchase, the Fund will repurchase shares on a pro rata basis. Limited liquidity will be provided to shareholders only through the Fund’s quarterly repurchases.
Liquidity Risk. Unlike many closed-end investment companies, an interval fund’s shares are not typically listed on any securities exchange and are not publicly traded. There may be no secondary market for the shares and it’s possible that no secondary market will develop. Limited liquidity is provided to shareholders only through the Fund’s repurchase offer period. There is no guarantee that shareholders will be able to sell all of the shares they desire in a quarterly repurchase offer. The Fund’s investments are also subject to liquidity risk. Liquidity risk exists when particular investments of the Fund would be difficult to purchase or sell, possibly preventing the Fund from selling such illiquid securities at an advantageous time or price, or possibly requiring the Fund to dispose of other investments at unfavorable times or prices in order to satisfy its obligations. Funds with principal investment strategies that involve securities of companies with smaller market capitalizations, derivatives or securities with substantial market and/or credit risk tend to have the greatest exposure to liquidity risk.
Before investing in the Fund, you should carefully consider the Fund’s investment objectives, risks, charges and expenses. For a copy of a prospectus which contains this and other information, please visit our website at www.nexpointres.com or call 1-877-665-1287. Please read the fund prospectus carefully before investing.
An investment in the Fund involves a considerable amount of risk. It is possible that you may lose money, including the risk that you may receive little or no return on your investment or that you may lose part or all of your investment. Consequently, you can lose money by investing in the Fund. No assurance can be given that the Fund will achieve its investment objective, and investment results may vary substantially over time and from period to period. An investment in the Fund is suitable only for investors who can bear the risks associated with the limited liquidity of the shares and should be viewed as a long-term investment. Before making your investment decision, you should (i) consider the suitability of this investment with respect to your investment objectives and personal financial situation and (ii) consider factors such as your personal net worth, income, age, risk tolerance and liquidity needs. An investment in the Fund is not appropriate for all investors.