Interval Fund 101

Why Interval Funds Continue to Gain Attention

The investment landscape has changed dramatically over the last several years. Higher interest rates, increased market volatility, tighter bank lending standards, and growing interest in private markets have led many investors to seek investment opportunities beyond traditional stocks and bonds.

At the same time, advisors have increasingly looked for ways to access alternative investments through structures that offer regulatory oversight, tax reporting simplicity, and operational efficiency. Interval funds have emerged as one of the primary vehicles helping bridge the gap between traditional investment products and alternative strategies.

Today, interval funds are commonly used to access private credit, stressed and distressed credit, real estate, infrastructure, specialty finance, and other investment opportunities that may not fit well within daily-liquid mutual fund or ETF structures.

What’s driving growth in the interval fund market?

Over the past decade, investors have looked to alternatives to diversify portfolios and pursue return streams that may differ from traditional equity and fixed income exposures. Interval funds are uniquely suited to providing access to alternative investments and asset classes including, but not limited to:

• Traded and non-traded real estate investment trusts (REITs)
• Traded and non-traded business development companies (BDCs)
• Traded and non-traded master limited partnerships (MLPs)
• Distressed/stressed credit
• Private credit
• Private equity/venture capital
• Hedge fund strategies
• Infrastructure
• Insurance-linked securities
• Currencies
• Publicly traded stocks and bonds

Where are interval fund assets by category?

Interval funds are used across a wide range of alternative investment categories. Credit and real estate strategies have historically represented a meaningful portion of the market, while investors have also used the structure to access equity, insurance-linked securities, private equity/venture capital, and multistrategy approaches.

Source: Interval Fund Tracker, https://intervalfundtracker.com/data/active-interval-funds/

What is an Interval Fund?

An interval fund is a fund structure that is being rediscovered by both asset managers and investors. It is technically classified as a “closed-end” fund under the Investment Company Act of 1940 (“’40 Act”). While an interval fund may take in new investments daily, it only allows redemptions or repurchases at specified intervals, most commonly through quarterly repurchase offers.

This key differentiator — specified liquidity intervals — allows asset managers to understand the maximum amount that may potentially be withdrawn at each interval. That visibility can allow managers to hold less liquid or longer-horizon investments without the same level of concern about excess short-term redemptions.

Other differentiators of interval funds are:

• They provide investors with the ability to invest in liquid marketable and non-liquid non-marketable investments.
• They can invest some or nearly all of a portfolio into illiquid investments while the interval repurchase program provides potential flexibility for investors to access their capital.
• Their shares typically do not trade on the secondary market. Instead, their shares are subject to periodic repurchase offers by the fund at a price based on net asset value.
• They are permitted to continuously offer their shares at a price based on the fund’s net asset value, and many do.

The table below provides a brief comparison of various structures:

• Interval funds allow limited liquidity and the ability to invest in illiquid or less liquid investments, much like hedge funds, but with the structure and protections of the ’40 Act.
• Exchange listed closed-end funds also provide for the use of illiquid investments, but investors’ purchase and sale is subject to market prices on the exchange which can be significantly different, either at a premium or discount, to the fund’s NAV.
• Open-end and exchange-traded funds are generally limited to 15% in illiquid investments. Interval funds occupy a middle ground between daily-liquid vehicles and private vehicles with less uniform or less regulated structures.

Potential Advantages of Interval Funds

• Active management across multiple asset classes and investments may add increased diversification
• Greater ability to invest in less liquid assets such as stressed/distressed credit, private credit, non-traded REITs, BDCs, MLPs, infrastructure, and private equity/venture capital
• Access to investments that may otherwise be limited to accredited investors*
• Potentially higher yields
• Ability to increase exposure to a variety of alternative asset classes without large direct capital commitments
• Potential reduction of “investment headline” risk**
• Potential to dilute the negative impact of a particular investment within the fund

*Investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings. See www.sec.gov for further explanation.

**The possibility that a news story will adversely affect a stock’s price.

Potential Disadvantages

• Limited liquidity, usually through quarterly or annual repurchase offers
• Potential lack of detailed transparency from some private or illiquid investments
• Potentially higher internal fee structure versus other types of funds
• Repurchase offers may be oversubscribed, meaning investors may not be able to redeem all shares submitted for repurchase

What are the liquidity rules and redemption policies associated with interval funds?

An interval fund will make periodic repurchase offers to its shareholders, generally every three, six, or twelve months, as disclosed in the fund’s prospectus and annual report. The interval fund will also periodically notify its shareholders of upcoming repurchase dates. When the fund makes a repurchase offer to its shareholders, it will specify a deadline date by which shareholders must submit their repurchase request. The actual repurchase will occur at a later, specified date, often shortly after the repurchase deadline date.

The price that shareholders will receive on a repurchase will be based on the per share NAV determined as of the specified and disclosed date. This pricing date will occur sometime after the close of business, often on the deadline date by which shareholders must submit their repurchase request.

Who should invest in interval funds?

Interval funds are designed for investors with a moderate-to-high risk tolerance, a mid- to long-term time horizon, and ample liquidity elsewhere in their portfolio due to the nature of periodic repurchase offers and the underlying investments.

Investors seeking to diversify their portfolio through alternative investment strategies may benefit from an interval fund’s diversified approach.

Interval funds are complex investment instruments that can contain a variety of investment types. Before investing in interval funds, investors should understand the liquidity features and characteristics of the underlying investments. Investors should work closely with their financial advisors to determine if interval funds are suitable for their portfolios and economic situations.

How Advisors Commonly Use Interval Funds

While every investor's situation is unique, interval funds are often considered in one of three portfolio roles:

For many advisors, interval funds are not intended to replace core stock and bond allocations. Instead, they are often evaluated as a complement to traditional portfolio exposures.

A Manager’s Perspective on Closed-End Interval Funds

From a fund manager’s viewpoint, interval funds possess a number of desirable characteristics:

1. Interval funds enhance the ability for investors to earn an “illiquidity premium”:
   
   One key advantage of the structure is the ability for an asset manager to expose investors to less liquid opportunities which may offer higher long-term returns. As the structure gives the manager visibility on the maximum potential outflow, less liquid opportunities can be held without fear of having to sell unexpectedly at unattractive prices.
2. Advantageous for liquid opportunities with longer time horizons:
   
   Fund managers often have ideas which take months, or longer, to play out. These opportunities can be in liquid securities, though time horizon is required to maximize the gain. The interval fund structure facilitates managers incorporating these opportunities in the knowledge they are unlikely to have to be sold prematurely.
3. Longer-term investment vehicles:
   
   Many investors have a tendency to sell when prices decline, crystallizing losses and increasing transaction costs. Interval funds, with their periodic repurchase windows, encourage investors to take a longer-term perspective, which is usually more consistent with their investment horizon.