What is Closed To New Accounts?
Closed to new accounts means an investment vehicle is no longer allowing new accounts to be added or opened.
- Closed to new accounts means that a fund or investment vehicle is no longer taking on new accounts from investors.
- The fund may often continue to operate with existing accounts, and may allow existing account holders to buy additional shares.
- Fund managers may close the fund to new accounts for a variety of reasons, usually to avoid excessive inflows to keep the fund from becoming too large in terms of total assets.
Understanding Closed To New Accounts
Closed to new accounts is a type of status for an investment vehicle. The name is self-explanatory. It means that the investment vehicle is no longer accepting new investors, though it is still operating for existing investors. This status can apply to mutual funds, hedge funds, or any professionally managed pooled investment vehicle. Sometimes funds will do a “soft close,” where existing shareholders can still buy shares even though new investors cannot open accounts or make purchases.
In addition, institutional money managers may close certain portfolio groups to new accounts, while leaving others open. In this case, there will be an "as of" date when the fund will officially close to new investors. Depending on the situation, this may or may not also affect the ability for current investors to add to their holdings in the fund.
Reasons for Closed to New Accounts Status
Funds most commonly close to new accounts in order to limit the total size of the fund. When a fund gets too large in terms of total assets there can be costs associated, the fund may start to run up against regulatory hurdles, or performance can be affected. Managing larger and larger funds may require more traders, analysts, and other staff, and more time resources finding assets to buy in to. Diversified funds may start to run up against regulatory limits on asset allocation and be forced to seek out more and more new assets, which can become cumbersome eventually. Wide-spread, small trades and holdings of many diversified assets may make the fund begin to resemble a general market index, which can make it ever more difficult to try to outperform the market. For funds that are not required to be diversified, decisions to buy and hold, (or sell-off), large quantities of a smaller variety of assets as the fund grows can start to impact the price of the assets themselves, which can present its own challenges.
Investment vehicles, specifically funds, may be in a closed to new accounts status, or may be closed completely for all accounts. Either way, it is important to distinguish between closed and closed-end funds. A closed-end fund is one in which there is a limited, specific amount of shares initially available to the public. Once all of those shares have been sold, the stock can only be sold or traded via an exchange.
A closed fund, on the other hand, didn’t necessarily have a finite amount of shares available. It has entered closed status for another reason. Closed-end funds are established with that categorization right from the start, while closed funds have entered that status at some point after their initial creation.
The managers of a fund can choose to close those funds for new investors for several reasons, but the most noticeable is to control the size of the fund and to lower the administrative costs. Generally speaking, the smaller a fund, the more nimble it can be and the more markets in which it can participate.
Some mutual funds become so large that monthly inflows can amount to billions of dollars. Over time, the expected return from new money will drag down the returns of current investors. Closing a fund off to new accounts is only one method of controlling the asset base's growth. Other means of controlling a fund’s growth include raising the minimum investment amount or stopping existing investors from contributing more to the fund.