Interval funds on the blockchain could change more than just how their shares trade. The Securities and Exchange Commission cleared the way for a tokenized share class of Cathie Wood's ARK Venture interval fund in late September. The $1.3 billion ARKVX invests in both public and private companies, and Wood's firm has already put shares of the fund on the blockchain with the help of tokenization firm Securitize.
That effort is separate from the tokenized share class permitted under the SEC's latest action, but the new structure, though not yet live, offers a glimpse of new potential use cases and where the market could be headed. Promoters argue that putting fund shares on a blockchain can bring efficiencies such as faster settlement and potentially lower costs. A tokenized version of a security also allows investors to trade shares 24/7 since crypto markets never close.
Investors in ARKVX can only redeem their shares four times a year with the issuer, unlike ETF investors who can buy and sell whenever the stock market is open. Those redemption requests are capped at 5% of total outstanding shares at net-asset value, a restriction that gives managers greater flexibility to hold investments that can't easily be sold on short notice. But a potential new tokenized share class would provide another off-ramp: investors, in that secondary round-the-clock market, could buy and sell to each other without asking Ark to redeem their holdings.
This theoretically could happen any hour and any day of the week. Would that render the redemption rules moot? Not quite. Unlike shares redeemed with the issuer, those sold in a secondary market aren't guaranteed to occur at the fund's posted asset value.
The secondary market gives investors the option of not having to wait for Ark to repurchase shares, as long as there's a buyer. Tokenization might make it easier to find the exit, but it doesn't guarantee you'll like the price, said a principal at Morningstar. There's a big difference between being able to sell an investment and being able to sell it for what it's supposedly worth.
That distinction becomes particularly important when investors want their money back urgently. Trades of the tokenized share-class versions won't have to happen at net-asset value since investors can buy and sell at any time. That means the new version might trade at a premium or a discount to the traditional shares.
A savvy investor could buy the interval fund at its current price (at NAV), exchange those shares into the tokenized one, and then sell the newly converted bunch at the higher price, thereby capturing a profit. This theoretical trade might work the other way around as well. If you buy the tokenized version at a lower price, you take what he calls "time value" into account.
Still, there shouldn't be a prolonged period of trading at a significant premium because new shares can be issued frequently. This theoretical trade might work the other way around as well.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing