As alternatives grow in popularity among individual investors, hedge fund and alternative managers are increasingly pursuing retail sales through interval closed end funds (iCEF) created as a result of partnerships, according to experts.
Apollo partnered with American Beacon, for example, and the Carlyle Group with OppenheimerFunds to create new closed end funds.
“There is a lot more interest in the products coming to market in the interval fund space, which are a type of closed end mutual fund that is hardwired to remain open in a continuous offering so that shareholders have liquidity as well as a quarterly, annual or semiannual tender,” said Kimberly Flynn, CFA and managing director of alternative investments with XA Investments in Chicago.
That’s partly because institutional assets are shrinking.
Flynn was among a panel of speakers at the New York Stock Exchange last week that included George Lucaci, partner with Mercury Advisors in New York, Drinker Biddle & Reath Attorney Benjamin D. McCulloch and
Abigail Corcoran, a former financial advisor.
According to a report from McKinsey & Company, excluding defined contribution, U.S. institutional assets have suffered cumulative net flows of negative $278 billion over the past 5 years.
“Currently, the assets under management in iCEFs seem to be from family offices, high net worth individuals and institutional investors in general,” McCulloch told Financial Advisor. “Many of our clients who are fund advisors are keen to bring interval funds to the retail investor market, which represents a huge untapped pool of assets that many have not previously accessed.”
However, the investments and risks that exist within iCEFs as opposed to other investment vehicles, such as mutual funds, are different.
“Interval funds must meet ongoing tender requests, which are typically every quarter,” Flynn said. “To meet these tenders, many interval funds will take cash received from new investors and use it to fund redemptions for exiting investors.”
The iCEF wrapper makes it easier for alternative managers to peddle investment strategies that apply to the private fund space to retail investors but the potential downside is being unable to fully redeem an investment immediately.