New research conducted by UMB Fund Services (UMB) in partnership with FUSE Research Network suggests that interval funds and tender offer funds – collectively referred to as unlisted `closed-end funds’ (CEFs) – are starting to show real momentum and growth in the marketplace. Not only that, but with no single asset manager (or concentrated group of managers) dominating the space, there is plenty of opportunity for new entrants eager to support the growing demand for non-correlated returns.
The research found that as of Q1 2017, there were 109 unlisted CEFs with total assets under management of approximately USD41.7 billion. Assets have grown at a six percent compound annual growth rate from 2014, when assets totalled USD36.6 billion. Of the 109 unique funds currently in the market, 76 are tender-offers, 33 are interval funds.*
“This data validates the increasing momentum we have been seeing specifically around interval funds. I believe this is the first published research that has gone to this depth in order to confirm the recent growth in these products,” says Tony Fischer, President of UMB Fund Services.
Regulation a key driver
Interval funds are not new. Indeed, UMB has been servicing them for nearly 20 years. However, until now it has not been a very robust marketplace. “It is moderate in size, which we think is good as there is no one dominant player. We believe there is plenty of room for newcomers,” says Fischer, who says that two factors precipitated the research.
Firstly, 18 months ago, disclosure requirements changed for non-traded REITs. This business had been lucrative for advisors and sponsors, but investors paid a lot of fees and did not have much transparency as to what the fees were that they were paying. “Hence the new legislation and the decision by the SEC to require sponsors to fully disclose fees and the actual value of the account to investors.
“The popularity of these products dropped, and sales fell by some 50 percent, as a result,” says Fischer.
Secondly, the Department of Labor has introduced the DOL Fiduciary Rule. In short, what this means is that brokers and advisors will have to demonstrate that they are acting in their clients’ best interests at all times.
As a result, products with higher fees and commissions like non-traded REITs will get eliminated because they are too expensive and their commissions are too high.
“The interval fund structure is an alternative to higher priced vehicles that are subject to changes in US legislation.
“We’ve invested in a lot of technology to service these funds; we have invested more than USD1 million in our transfer agency capability. As a result, we are a leader in this space in terms of investor accounts and servicing. We offer a platform called Registered Fund Solutions (RFS), a turnkey solution to launch interval funds. This unique platform was designed to lower overhead through certain shared expenses and eliminate barriers to entry such as the difficulty of selecting service providers and trustees.
“We are actively talking to a number of managers looking to launch one of these products so the research helped to validate what we were doing,” explains Fischer.
Differences between interval and tender-offer funds
Interval funds offer their shares continuously, generally calculate a daily net asset value (NAV) and periodically offer their shareholders a buy-back of a stated portion of their shares at NAV (eg monthly, quarterly, semi-annually, or annually).
“With an interval fund, although it is limited to repurchases between 5 per cent and 25 per cent of its shares for any given period, it does give investors a daily NAV and the chance the buy shares every day,” says Fischer.
Unlike interval funds, tender-offer funds calculate a monthly, as opposed to a daily NAV. On the redemption side, the frequency and amounts of repurchases of an interval fund can only be changed by shareholder vote. In other words, a board of directors cannot override it. That gives investors more comfort, says Fischer, especially in a stressed market, as the sponsor cannot suddenly decide to suspend redemptions for two years, for example.
In a tender-offer fund, it is up to the discretion of the board of directors to approve any changes to the fund’s redemption policies.
“Administering these products is not easy, they can be quite tricky operationally speaking. You have to provide anywhere from 21 to 42 days notice that an investor wishes to redeem their shares, meaning each quarter you have lots of overlaps: last quarter’s tender requests coming in just as we might be sending out this quarter’s tender requests.
“To keep track of everything and make sure the funds know what they need to honour in terms of redemptions, is paramount. Our platform helps manage all of the details,” comments Fischer.
The research found that registration filings for CEFs are higher than they have ever been. Some 13 interval funds were filed in 2015, 29 were filed in 2016 and there were 25 filed through the first half of 2017. At this rate, the total should exceed 2016’s figure and set a new record.*
Plenty of room for everyone
Currently, no single manager or fund really dominates the market. Five funds account for approximately 40 per cent of the total AUM but those five funds are managed by four different asset managers – these include Skybridge Capital (a multi-alternative tender offer fund with USD.5.4 billion in AUM), Stone Ridge Asset Management, whose Insurance Linked Securities interval fund has USD4.3 billion in AUM, and SilverBay Capital Management, whose equity long/short interval fund has USD1.8 billion in AUM.*
If one looks at the US mutual fund industry, it is hugely concentrated among the top 25 asset managers, and with respect to ETFs, there are three big names that dominate (in terms of total AUM). In Fischer’s opinion, 40 per cent of unlisted CEF assets across four different management groups, is not too much concentration at all.
“There is still so much room for new players to come in to the interval fund space and gather assets. We expect the number of managers to increase going forward.
“We are seeing some larger household names moving into this space,” enthuses Fischer. He agrees that exceeding USD100 billion will be an important milestone.
Until it becomes completely standardised like US mutual funds, however, the unlisted CEF space will continue to be affected by human error. Those who can automate and make processes more streamlined to eliminate human error are going to be in a stronger position to capitalise on future growth, as managers will want to work with such administrators.
“That is what we are focused on right now,” says Fischer, who concludes: “In terms of current demand, it is the more sophisticated managers, running less liquid, more esoteric strategies that are interested in establishing these products, as compared to traditional long-only equity managers.”
*To read the research report in full click here: http://contact.umbfs.com/unlistedcefs/
