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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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%.