Closed-End Funds, Interval Funds, and Unit Investment Trusts

This flashcard set covers the key vocabulary and concepts regarding closed-end management companies, interval funds, and unit investment trusts (UITs) based on lecture notes.

Closed-end management company

A type of investment company that pools investor money and sells a fixed number of negotiable shares through an initial public offering (IPO), which then trade between investors in the secondary market.

Capitalization

The method by which a corporation structures its capital, consisting of equity/stock, debt, and retained earnings.

Prospectus

A document providing detailed information about the issuer and the security being sold; it must be delivered to every purchaser during the IPO of a closed-end fund.

Commissions

The fees investors pay for trading closed-end fund shares in the secondary market, distinct from the sales charges associated with mutual funds.

Margin

The practice of using borrowed money to purchase securities, which is permitted for closed-end funds but not for mutual funds.

Net asset value (NAV)

A calculation reflecting the value of assets held in a portfolio; for closed-end funds, it serves as a ‘book value’ reference point while market price is determined by supply and demand.

Interval funds

A unique type of closed-end management company that does not trade in the secondary market; investors purchase and redeem shares directly with the issuer at NAV (plus potential sales charges) at specific times.

Repurchase offer

An offer made by an interval fund at specific intervals (monthly, quarterly, semi-annually, or annually) to repurchase shares from liquidating investors.

Pro-rata basis

The method used to allocate redemptions when investor requests exceed the limit an interval fund is willing to repurchase, typically capped at $25\%$ of outstanding shares.

Redemption fees

Fees charged to investors liquidating shares in an interval fund, which are legally capped at a maximum of $2\%$.

Liquidity risk

The risk that investors may be unable to access their money quickly, a characteristic of interval funds due to their limited redemption windows.

Unit investment trust (UIT)

A redeemable security similar to a mutual fund but with a fixed portfolio; once the professional money manager selects the holdings, they generally aren’t changed (‘set it and forget it’).

Redeemable securities

Securities, such as UITs and mutual funds, that require investors to transact directly with the issuer for purchases or liquidations rather than through a secondary market.

12b-1 fees

One of several costs, including management fees and high expense ratios, that contribute to the layers of expenses for investors in interval funds.