Investment fund closed

economic-dictionary

A closed investment fund is one that does not allow the entry of new investors and / or the realization of new investments by existing investors.

An investment fund can become a closed fund both temporarily and permanently. This may be due to various factors, but the main one is usually to maintain efficiency in the management of the investment fund.

There are investment funds that carry out a very specific investment strategy, or with defined limits. In them, if the capital obtained from investors is large, it can be difficult to execute the investment style efficiently. When this happens, the fund is usually closed, either to the entry of new investors or to the realization of new investments by the current investors.

It should also be noted that closed mutual funds can also limit redemptions to current investors. That is, they have the ability to establish a period of time during which no investor can withdraw their capital.

Factors that originate the transformation into a closed investment fund

There are a number of specific factors that lead fund managers to convert it into a closed fund, to drain more capital from entering it. Let's look at some of those factors:

  • Fund liquidation: Low demand and / or increasing redemptions by investors may lead to the closure of the fund. So that, subsequently, the liquidation of this is carried out and the capital returned to the investors.
  • Excess capital: Some funds could lose efficiency if they have a very high volume of capital. Imagine the example of an investment fund that only invests in small companies in the real estate sector. Where, having a large capital dimension, could force you to buy more shares than expected of the companies you have in your portfolio. And, therefore, it could hurt the expected profitability of those investments.
  • The diversification rule: There is a diversification rule that establishes that investment funds cannot invest more than X percentage of their equity in a company. Therefore, if demand for the fund increases, it could pressure managers to buy unwanted company assets. Therefore, in these cases, fund managers usually close the fund to avoid this situation.

Advantages and disadvantages of a closed fund

To better understand the vision of a closed fund from the investor's perspective, we are going to see some advantages accompanied by some disadvantages of this type of fund. As main advantage we would have:

  • Alignment of interests between manager and investor: That the fund manager decides to close it to new investments is a clear advantage for the investor. Because you are more concerned with achieving the target return for investors, rather than raising more capital for the fund.

Regarding the disadvantages for the investor, we could highlight:

  • Restriction of subscriptions and redemptions: Closing the fund represents a drain on current investors of their liquidity, as mentioned in previous sections. Since, the reimbursement of your participations is limited or restricted. As for new investors, it would mean a prohibition to enter the fund. Which could translate into a potential loss of profitability due to the impossibility of being able to invest in it.

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