With competition among the more than 10,000 mutual funds out there continuing to rise, companies are going to ever-greater lengths to lure investors. But with interval funds -- one of the latest batch of trendy fund offerings -- it's not so easy for investors to get out once they get in.
Interval funds are closed-end funds, many of which give investors entry into the clubby world of venture capital and hold out the attraction of big returns. However, it's worth poring over the fine print, because the risks are substantial: Interval funds typically invest in riskier types of investments that are thinly traded. They also only allow investors to redeem small fractions of their shares -- usually 5% and occasionally as much as 25% -- in small windows of time. Typically, these redemption periods are only once a quarter or even as infrequently as only once a year, and on a pro rata basis, at that.
There are other potential reasons to avoid these funds: "They are definitely not cheap," says Eric Jacobson, a senior analyst at
. Interval funds may require a high minimum investment of $10,000 or $25,000 and can carry expense ratios of as much as 2% to 3% more than an average equity mutual fund. Interval funds are usually broker-sold and aren't available on exchanges unlike popular
Interval funds tend to specialize in one of just three types of sectors: venture capital, participation loans and municipal bonds. (A participation loan is one in which more than one lender participates in the loan because the loan amount is so great that it exceeds the legal lending limit of an individual bank.)
So, with all these risks, why buy them?
"Yield is the reason to buy an interval fund," says Donald Cassidy, senior analyst with
, noting that some venture capital interval funds, particularly recent ones like the newly launched
Orbitex Life Sciences & Biotechnology
fund, have the potential for high returns.
But this benefit does come at a cost -- namely risk and lack of liquidity, Cassidy says. Before getting into an interval fund, investors have got to realize "there is no
easy way out," Cassidy says. "They will not have an exit door except at the interval times, and even then, they may not
be able to reobtain all that they have tendered."
"These are high-risk" instruments, says Philadelphia-based fund consultant Burton Greenwald. "An individual investor with a diversified portfolio might have room for
an interval fund on the margins," says Morningstar's Jacobson.
Greenwald thinks that the recent flurry of venture capital interval funds is in line with the many technology funds that have hit the market of late. Venture capital interval funds "are the kinds of creatures that tend to crawl out towards the end of a bull market, fueled by the voracious appetite of investors looking for the 30% to 40% kinds of returns we have had in equities," Greenwald says.
For this risk, investors potentially can get higher returns, analysts say. However, the technology and pre-IPO markets that are a focus of some of these offerings have dried up this year, which adds another layer of uncertainty.
Of course, all interval funds are not the same. Private-equity interval funds are risky, but interval funds invested in participation loans or municipal bonds are more of an alternative to money-market or fixed-income funds, analysts say.
One interval fund that is about to hit the market is the
Scudder Weisel Digital Innovators
fund. With a minimum investment of $25,000, this fund hopes to cater to investors with high net worth looking to invest in pre-IPO telecommunications and medical technology firms. The fund will invest up to 50% of its assets in privately owned firms that expect to go public within 24 months, according to an Oct. 5
Securities and Exchange Commission
prospectus filing. Like other interval funds, it will only allow a small window of opportunity for redeeming shares by promising to redeem only 5% of outstanding shares once every quarter.
The fund is a result of a new joint venture between Scudder's parent company,
Zurich Financial Services Group
, and the merchant-banking firm
Thomas Weisel Partners
. The Digital Innovators fund will charge $25 for each Class A share, which will be sold through brokers with a maximum 4.75% sales load on purchases of less than $100,000, according to the filing. Investors may also purchase Class O shares directly from Scudder Weisel for $24.55 a share, with a maximum 3% sales load on purchases of less than $750,000, according to the filing. The fund's annual fees will also be "higher than those paid by most other funds." A spokesperson for Thomas Weisel could not pinpoint when the fund will be available.
introduced a venture capital interval fund Sept. 18. Called
, it raised $200 million by the time it closed to new investors at its preset closing date of Oct. 12, according to Munder. Managed by a team including portfolio manager Steve Appledorn, @Vantage will invest up to 40% of its assets in private or pre-IPO Internet and technology firms. Because it gives investors with a $10,000 investment minimum ($2,000 for IRA accounts) entrance into the dot-com and venture capital world, Munder has been touting the fund as having "extreme risks" and "explosive potential."
Munder is charging a maximum 4% load, or sales charge, for the fund, which is only broker-sold, in addition to annual fees of 3%.
Orbitex's Life Sciences & Biotechnology fund, launched on Oct. 2, invests 25% to 30% in privately held, pre-IPO companies, said portfolio manager Timothy Bepler. Bepler says an interval fund focused on this sector makes sense because two-thirds of biotechnology companies are privately held.
The Orbitex Life Sciences & Biotechnology Fund requires a $25,000 minimum investment, carries a 4% load whether it is purchased through a broker or directly through Orbitex and has an annual 2.75% fee. It is being offered at $26 a share. This fund, too, will repurchase only 5% of outstanding shares each quarter.
In spite of the lackluster performance of the technology sector, Bepler believes that biotechnology has a strong future and will concentrate his fund in firms dealing with genomics. "A lot of people say that the human genome is to health care what the semiconductor was to technology over the last 30 years," Bepler says.
The interval funds recently launched have not made a tremendous splash, however. Orbitex originally expected to raise up to $100 million for the Orbitex Life Sciences & Biotechnology Fund through an initial subscription period ending Nov. 2. But due to the fact that Orbitex has not attracted as many assets as it had hoped, this subscription period has been extended for up to 90 days, says Bepler. He was unable to quote how many assets had been collected for the new fund as of Nov. 3.
Munder announced that it would close its new @Vantage fund on Oct. 12 or as soon as it raised $1 billion. It closed on Oct. 12 with $200 million of assets under management.
announced it would launch the first family of interval funds. However, on Sept. 19, Liberty closed one of the three funds included in this "family" of participation loans, the Colonial Investment Grade Bond fund, due to lack of investor interest, said Wendy Rauch, a Liberty spokesperson.