Interval funds - hybrids between open end and closed end funds - are gaining popularity in the mutual fund industry because of the special benefits interval funds offer, according to Lipper of Summit, N.J. The number of interval funds available has skyrocketed from a lone interval fund in 1992 to a record 33 interval funds as of year-end 1999, according to Lipper. Sixteen interval funds were introduced in 1999. At the end of November, interval funds had more than $28 billion under management, according to Lipper. That is up seven-fold from $4 billion at the end of 1992.

Of those funds introduced in 1999, most were bank loan funds. But, there were also two Merrill Lynch municipal bond funds and the Seligman New Technologies Fund, both introduced in July.

An interval fund has characteristics of both closed-end and open-end funds. Like closed-end funds, interval funds are more illiquid than open-end funds. Shares of closed-end fund portfolios are offered once through an initial public offering. Then the fund's portfolio is closed, and investors may only buy shares of the fund as they would a stock - via an exchange at current share prices. Closed-end funds do not allow daily redemptions but they can hold tender offers at will.

Interval funds, unlike closed-end funds, do not trade their shares on a stock exchange in a secondary marketplace.

Interval funds resemble open-end funds in that their shares are continuously offered for sale each day. They may also tack on distribution fees, which are the equivalent of 12b-1 fees in the open-end fund universe. They may also issue separate classes of shares enabling them to be distributed to a variety of audiences. Closed-end funds can not charge 12b-1 fees and do not offer differently-priced share classes.

Interval funds were created in 1992 when the SEC sought to prevent the discounts suffered by many closed-end funds. Discounts exist when the net asset value price of the fund's portfolio is greater than the fund's exchange-traded share price.

The interest in interval funds appears to be continuing in the new year. At least one fund group has filed to introduce a new interval fund. Colonial Management Associates of Boston currently has its Colonial Investment Grade Interval Trust fund in registration. Colonial is the first fund sponsor to use "interval" in its name and the usage marks the growing acceptance of interval funds, said Chris Bouffard director of closed-end fund products and research in Lipper's Denver office.

Meanwhile, the AIM Family of Funds of Houston, Tex. is asking shareholders to approve structural changes in its $436 million AIM Floating Rate Fund, a bank loan participation fund, that would convert it to an interval fund.

The AIM Floating Rate Fund, which AIM inherited with the purchase of the asset management division of Liechtenstein Global Trust and its G.T. Global Funds in May 1998, has been a quasi-closed-end fund with open-end features. While the fund's portfolio is "closed," the fund has traditionally held quarterly tender offers allowing shareholders to redeem a small percentage of their shares.

While AIM's board of directors has historically approved each of the quarterly tender offers, there is currently no contractual obligation to offer quarterly redemptions. said John Roeme, an AIM spokesperson. Moreover, unlike other closed-end funds, the AIM Floating Rate Fund does not trade its shares on a stock exchange in a secondary market. Instead, the fund is sold at a single net asset value share price.

If the AIM Floating Rate Fund becomes an interval fund, its now optional quarterly tender offers will be required, according to the fund's proxy statement, filed Jan. 7. That translates into increased liquidity for shareholders, said Roeme.

"By switching to an interval fund structure, investors will have better access to their fund shares and better liquidity," Roeme said. According to the fund's filing, the AIM Floating Rate Fund will conduct consolidated repurchase offers for between five percent and 25 percent of the fund's outstanding shares. The fund's first planned required repurchase would take place by May of this year.

If AIM wins shareholder approval, the fund will also abandon its existing master-feeder structure and will add Class B shares. The plan is to also introduce Class C shares in the future to further broaden distribution, according to the filing.

AIM will also seek shareholder approval to install a 0.25 percent distribution fee. AIM obtained approval from the SEC to introduce the new 12b-1-like program, pending shareholder approval, said the filing. Since interval funds are offered for sale on a daily basis, the SEC has in the past granted permission for the use of distribution fees on interval funds.

The fact that interval, unlike closed-ends funds, can tack on 12b-1 type fees, is very appealing to fund advisers, said Bouffard of Lipper. These fees are just one of the advantages causing fund firms to consider interval funds, he said. The fee can be used to pay for the cost of distributing fund shares.

Moreover, the concept of a continuously-offered interval fund is appealing to fund sponsors and financial intermediaries who sell fund products.

"A closed-end fund is on the market for four weeks then closes," said Ken Fincher, exchange-traded fund product manager at John Nuveen & Co. in Chicago. Nuveen is the adviser for $18 billion in assets in 64 closed-end and interval funds.

"The problem is if you initially sell say $300 million at the offering, a year later you still have the same $300 million," said Fincher. "But with an interval fund, you can buy and sell shares and grow the assets. You always have a product to offer."

Last year, Nuveen started two bank loan participation funds. The Nuveen Senior Income Fund was introduced as a closed-end fund. But the Nuveen Floating Rate Fund was introduced in November as an interval fund and offers four share classes.

Share classes are another relatively new phenomenon for interval funds, said Bouffard of Lipper. While Eaton Vance is credited with being the first interval fund to have multiple share classes, others soon followed. Scudder Kemper Investments of Chicago, Liberty-Stein Roe of Boston, OppenheimerFunds of New York and the North American Senior Floating rate Fund managed by Cypress Tree Asset Management of Boston have all adopted multiple share-class structures to their interval funds.

Accounting rule changes in 1998 also made interval funds economically much more appealing then closed-end funds. In September 1998, the Financial Accounting Standards Board (FASB), the self-regulatory body governing the accounting industry, mandated that closed-end funds had to take an immediate charge to their balance sheets for start-up costs. Closed-end funds that met certain criteria had to take the charge in the fund's first year of operation. Previously, funds had amortized those expenses over several years.

But, because interval funds do not meet the strict FASB criteria under which closed-end funds must take an immediate charge, start-up initial costs such as broker commissions may still be extended over a period of several years.

And, the interval fund structure of single pricing means fund advisers will not have to deal with discount problems, said Bouffard.

"They don't need to fear arbitrageurs coming in to buy up cheap shares," he said.

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