Sean Teehan reports that more than 20 closed-end funds have filed to allow non-accredited investors to purchase shares following a May announcement from the SEC that it is considering loosening the long-standing 15% cap on private fund holdings in closed-end funds. Since the SEC’s signal, 24 funds have filed with the SEC to amend prospectuses, potentially opening interval funds up to a broader investor base.
Kimberly Flynn, president of XA Investments, cautioned that retail investors must be aware of the layered fee structure in interval and tender offer funds that invest more than 15% in private funds. “Interval and tender offer funds that invest more than 15% in private funds charge two layers of fees,” Flynn said, pointing to both the interval fund management fees and the underlying private fund fees.
These underlying fees typically include base management and performance fees—often called “acquired fund fees.” Flynn noted, “Such acquired fund fees and expenses do not show up in the interval fund’s net expense ratio in the interval fund’s shareholder report because they are not a direct cost or cash expense for shareholders. The acquired fund fees and expenses will hit the interval fund’s net asset value and are a form of indirect cost.”
Industry experts say that before these products are marketed to retail investors, firms will need to demonstrate their track record in managing liquidity during periods of market stress and simplify disclosures to ensure investors understand the risks and mechanics of these funds.
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