To assist advisers considering the unlisted closed-end fund wrapper for new products, Ultimus collaborated with Interval Fund Tracker to examine predominant fee structure options and trends across various strategies in the interval fund marketplace targeted to retail and high-net-worth investors.

Click here to access the full report.

Annual fund expenses are typically found in a fund’s prospectus (like with mutual funds) following the prospectus summary. Federal securities laws require disclosure of certain fees and expenses by class (if the interval fund has exemptive relief to offer multiple classes) in its prospectus as a percentage of net assets.

Every interval fund prospectus will contain a table similar to the following outlining the different types of fees and expenses:

Each item in the table is presented as a percentage of net assets.  In this article we provide an explanation for the different expenses that interval funds pay.  Understanding fees and expenses allows you to compare different fund choices. 

Management Fees

Management Fees are the fees the adviser charges for providing investment management services to the fund. Under the Investment Company Act of 1940, as amended (the “1940 Act”), all investors must pay the same management fee. Details can be found in the “Management of the Fund” section of the prospectus. If the fund has qualified client investor restrictions, the manager may charge a performance fee. If the fund has accredited investor restrictions and is invested in fixed income, they may have a performance fee that is a percentage of the income generated over a hurdle rate.

Distribution/Service Fees

Distribution/Services Fees are fees generally paid to the selling broker-dealer or agent, and they may vary by share class. Most often these fees will be 0.25% and 0.75% of a fund’s net assets.

Operating Expenses

Operating Expenses include non-advisory costs of operating the fund. This typically includes expenses related to legal, audit, administration, custody, investor recordkeeping, SEC and FINRA, trustee fees, insurance, mailing, printing, and other fees and expenses.

Fee Waiver or Fee Cap

Fee Waiver or Fee Cap are rebates the fund sponsor (usually the investment adviser) may use to limit the total expenses of the fund. This is very common with new fund launches that have not reached scale to cover expenses. The fund sponsor will offset the additional costs but the SEC allows these fees to be recouped within a certain window of time, generally a three-year look back. Nearly all interval funds have expense limitation and reimbursement agreements in place during the initial years of fundraising. Asset managers should view expense limitation agreements as a long-term investment.

Acquired Fund Fees

Acquired Fund Fees represent the fees and expenses of any funds held by the interval fund. A fund that makes direct investments might actually be a better deal for investors when compared to a fund of funds, even if the base management fee level is higher. On the other hand, a fund of funds strategy might provide
access to top managers that generate consistent alpha but are inaccessible to most investors due to high investment minimums. The manager will provide estimations of acquired fund fees in their prospectus, but the actual acquired fund fees will vary widely depending on the performance of underlying funds.

Overall Expense Ratios

The expense table provided in an interval fund prospectus adds up an estimate of the overall expense ratio. The base management fee is usually fixed as a percentage of assets, but the other figures provided in the prospectus for the other fees are only estimates. The actual realized expense ratio, may be higher or lower than anticipated, depending on how quickly the fund gets to sufficient scale. Expense ratios will typically be higher in the early years of a fund’s existence. In the long run, successful interval funds will generate sufficient gross returns to overcome the cost of running the fund.

This is an excerpt adapted from Pricing Strategies for Retail Oriented Interval Funds. Click here to access the full report.

With an Interval Fund Tracker Premium Membership you can compare realized gross and net expense ratios across different strategies and funds.