What are Open-End Funds?

Investment Period: Open-end funds are set up as legal entities that are constantly raising new capital from investors and continuously deploying that capital into new investment. Open-end funds generally do not have a set fundraise time horizon.

Capital Call: Generally, 100% of investor’s capital is called at the time of commitment.

Redemptions: These funds typically have redemption mechanisms in place to allow for investor liquidity after a certain minimum investment period, commonly known as a lock-up period. Lock-up periods generally range from one to three years and will always be clearly identified in offering documents.

Valuation: One of the key components of an open-end fund is the manager’s ability to accurately value, or mark to market, each asset on a quarterly basis. Investors in open-end funds are issued shares of the fund when they make their initial investment. Each quarter when the manager updates the asset values for the portfolio, the share price will fluctuate based upon the aggregate value of assets in the fund.

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HELPFUL DEFINITIONS

Cash Flow: Investors typically receive (or accrue) cash distributions for the quarter. The combination of share price appreciation (or depreciation) and cash distributions are much like how a traditional stock works with fluctuations to the share pricing as well as dividends paid out to investors. Similar to a publicly traded stock, when an investor wants to redeem (or sell) their shares, pricing is based upon the most recently calculated share pricing by the manager.  When investors are calculating their total return for the open-end fund investment, they must factor in both the cash distributions and the share price changes.

Preferred Return: Open-end funds will commonly have what is called a preferred return, as well as a profit-sharing structure that compensates the manager for performance above the preferred return. The preferred return is not a guaranteed return amount, it is the baseline amount that fund performance needs to achieve before the manager starts to share profits with investors. The preferred return structure identifies how profits will be shared between the investor and manager of the fund.

Similar to many other facets of pooled investment funds, preferred return structures vary greatly. In general, a 6% to 10% preferred return is typical, while a 40% to 20% profit participation by the manager is common in the industry. Using the lower end of the previous metrics, the 6% preferred return means that investors are entitled to 100% of the first 6% of the fund’s performance. For any performance exceeding the 6% figure, investors would receive 60% above 6% and the manager would receive 40%.

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Nothing in this blog is or should be construed as investment advice or an offer or solicitation of offers of investments. Both Real Estate Investments and Securities offerings are speculative and involve substantial risks. Risks include but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk. Investments may not achieve their objectives. Investors who cannot afford to lose their entire investment should not invest in such offerings. Consult with your legal and investment professionals prior to making any investment decisions. All Securities are offered through North Capital Private Securities, Member FINRA/SIPC.