Funds are of two main types: registered investment companies and private funds.Registered investment companies
Registered investment companies are registered under the 1940 Act and subject to significant disclosure and ongoing compliance obligations. As registered investment company securities are also registered under the 1933 Act, they may be offered to the public.
Registered investment companies can be further divided into three categories: mutual funds, closed-end funds and unit investment trusts.
Mutual funds (also known as open-end funds) are investment companies that sell shares on a continuous basis. Mutual fund shares are purchased directly from the fund or from a broker for the fund. The purchase price is equal to the fund’s net asset value per share, plus any sales charges or other upfront fees.
Investors liquidate their investments in a mutual fund by selling their shares back to the fund. The sale price is equal to the fund’s net asset value per share, minus any redemption or other fees.
Mutual funds pursue a wide variety of investment strategies. Stock funds, bond funds, index funds, money market funds and ETFs may all be organized as mutual funds.
Unlike a mutual fund, which offers share continuously, a closed-end fund sells a fixed number of shares in an initial public offering. The shares then trade in the secondary market at a price that may be greater or less than the fund’s net asset value. As closed-end fund shares are generally not redeemable, investors wishing to exit from their investment must generally rely on the secondary market to sell their shares.
An interval fund is a type of closed-end fund that is permitted to offer shares continuously at a price based on the fund’s net asset value and periodically offers to repurchase its shares from shareholders. Such repurchase offers are generally made every three, six or twelve months. The purchase price is based on the fund’s net asset value per share as of the date specified in the repurchase offer (generally, no more than 14 days after the date on which shareholders must submit their acceptance of the repurchase offer). As closed-end fund shares do not typically trade in the secondary market, investors must rely on the repurchase offers for liquidity.
Closed-end funds may invest in a greater amount of illiquid securities than mutual funds and, therefore, are the preferred form of organization for funds engaging in such investments.
Unit investment trusts
Unit investment trusts issue a fixed number of securities (“units”) as part of a public offering. Investors may redeem units upon request at their approximate net asset value.
A UIT will terminate and dissolve on a fixed date, which will be specified when the UIT is created. A UIT does not actively trade its portfolio. Instead, it will hold a more or less static portfolio until its termination date. Upon termination, a UIT’s portfolio is liquidated and the proceeds are paid to investors.
Private funds differ from registered investment companies in that they are offered only to a limited number of financially sophisticated investors rather than to the general public. This allows private funds to avoid registering as investment companies under the 1940 Act or registering their securities under the 1933 Act. As a result, private funds avoid many of the ongoing reporting and compliance obligations imposed on registered investment companies. Common types of private funds include hedge funds, private equity funds and managed futures funds (also known as “commodity pools”).
In contrast to registered investment companies, which must always be organized within the United States, private funds are often organized in offshore jurisdictions for tax, regulatory and marketing reasons.