Open-ended vs closed-ended funds: how they differ

The difference lies in how investors get in and out. An open-ended fund continuously issues new units to investors who want to buy and redeems units from investors who want to leave, at a price based on the net asset value (NAV). Its size changes with these flows. A closed-ended fund raises capital during a defined subscription period, invests it, and does not redeem units on demand. Investors get their money back when the fund ends or by selling their units to someone else. An ELTIF is closed-ended by default: under Article 18 of the ELTIF Regulation, investors cannot request redemption before the end of the fund's life, but the rules may allow limited redemptions during the life under strict conditions, as well as matching of units. Neither structure is better in general. Each fits different assets and different investor needs.

How does an open-ended fund work?

In an open-ended fund, the fund itself is the counterparty. When you invest, the fund creates new units at the current NAV per unit, plus any entry fee. When you redeem, the fund cancels your units and pays you the NAV per unit, minus any exit fee. The number of units in issue changes every time investors come or go.

Most UCITS funds work this way, with regular redemption under the fund rules. Open-ended structures suit assets that can be sold quickly and valued from market prices, because the fund must be able to raise cash to pay leaving investors. See ELTIF vs UCITS mutual fund.

How does a closed-ended fund work?

A closed-ended fund collects commitments or subscriptions from investors over a set period, then closes to new money and invests. Investors cannot ask the fund to buy back their units at will. The fund returns capital as it sells assets, typically towards the end of its life, and sometimes distributes income along the way.

If you want to leave early, you need to find someone to buy your units. For some closed-ended funds, units are listed on an exchange, where the price is set by supply and demand and can differ from the NAV. For many others there is no organised market, and a sale must be arranged privately or through a matching facility, if one exists.

Closed-ended structures suit illiquid assets such as property, infrastructure and private companies, because the manager does not need to sell assets to meet unexpected redemptions.

How do they compare side by side?

Where does an ELTIF fit?

An ELTIF is closed-ended by default, with options that move it partly towards an open-ended design.

• Default rule. Under Article 18(1) of Regulation (EU) 2015/760 as amended, investors cannot request redemption before the end of the ELTIF's life. Redemptions are possible from the day after the end of life. The rules must state the end date clearly and may allow a temporary extension.
• Redemptions during the life. Under Article 18(2), the rules may allow them, but only if no redemption is granted before the end of the minimum holding period, the manager can demonstrate an appropriate redemption policy and liquidity management tools compatible with the long-term strategy, the policy sets out clear procedures and conditions, redemptions are limited to a percentage of the fund's liquid assets, and requests above that percentage are reduced pro rata with equal treatment of investors.
• Transfers and matching. Under Article 19, the rules must not prevent investors from freely transferring units to third parties other than the manager. The rules may also allow matching, in which exiting and incoming investors are paired. Article 30(2) requires a written alert to retail investors that matching does not ensure or create a right to exit or redemption.

An ELTIF that allows redemptions during its life is sometimes described as semi-open or evergreen-like, but the conditions remain strict. You may receive only part of what you request, and nothing before the minimum holding period ends. See ELTIF liquidity and redemption.

Why are property funds sometimes closed-ended?

Real estate is slow to buy and sell. A building may take months to sell at a fair price. If a property fund promises frequent redemptions, it must either keep a large share of its money in cash and liquid securities, which dilutes its property exposure, or risk being forced to sell buildings quickly when many investors want to leave at once. Forced sales can lower prices and hurt the investors who stay.

A closed-ended structure removes that pressure. The manager can hold properties for as long as the strategy requires. The trade-off is that investors bear the illiquidity directly.

Can an open-ended property fund suspend redemptions?

Open-ended funds holding illiquid assets typically include tools in their rules to manage periods of heavy outflows, such as notice periods, limits on redemptions or temporary suspension. The availability and use of such tools depends on the applicable framework and the fund rules. The key point is that an open-ended label does not ensure you can always exit when you want, especially when the underlying assets are illiquid. Read the redemption section of the prospectus.

A practical example

A hypothetical illustration, not data on any fund: in an open-ended fund, an investor submits a redemption request, and the fund pays out the NAV per unit after the notice period, selling liquid assets if needed. In a closed-ended ELTIF without redemptions during its life, an investor who needs money early asks the distributor about a transfer. A matching facility finds a buyer, but only at a price below the latest NAV, because the buyer is taking on a long-term, illiquid position. The investor must decide whether to accept the lower price or wait until the end of the fund's life.

What are the risks and limitations?

• Open-ended funds holding illiquid assets face a liquidity mismatch. In stress, redemptions may be limited or delayed, and investors who leave early may affect those who stay.
• Closed-ended funds put the exit risk on investors. Units may be hard to sell, and the price on a secondary market can be well below NAV.
• ELTIFs combine features of both, so check the rules for the end date, possible extensions, the minimum holding period, any redemption cap and whether a matching facility exists. The real-estate fund risks guide puts liquidity next to the other risks.

Which structure is better for real estate?

Neither in general. An open-ended structure offers more regular access but can struggle when many investors want to leave. A closed-ended structure aligns better with long-term assets but leaves investors with limited exit options. Choose based on when you might need the money and how you would cope if you could not get it. The pre-investment checklist lists the questions to ask.

Frequently asked questions

General information. Not investment advice or a suitability assessment.

Copy link