Are you interested in exploring alternative investments but are concerned about having your investment locked up for relatively long periods of time—like some private funds require? If so, interval funds may be worth considering. They offer the ability to invest in less liquid assets in private and public markets.
Let’s explore interval funds and their unique considerations to see if they might be of interest to you.
What are interval funds?
Interval funds are a specific type of unlisted (i.e., not listed on an exchange) closed-end fund that offers transparency of holdings, while enabling the ability to invest in less-liquid alternative assets in private as well as public markets.
There’s a major distinction. Unlike a traditional open-end mutual fund or ETF—which allows investors to redeem shares on a daily basis—interval funds may only be redeemed (i.e., sold) through repurchase offers by the fund based on an established interval (e.g., typically quarterly). It’s important to note that, even during the redemption period, it’s possible the fund may not pay out/offer the liquidity requested by the investor.
Who might interval funds primarily be appropriate for? Depending on the investor’s objectives, they may be suitable for long-term, buy-and-hold investors who want access to alternatives in private markets, but either aren’t ready to commit to long lock-up periods or aren’t eligible for private funds.
Here’s why you might consider interval funds
Alternatives provide investors with an opportunity to expand beyond traditional investments like stocks, bonds, and cash via a range of opportunities that could potentially help improve diversification, generate income, enhance returns, or manage risk.
An interval fund is set up to be more flexible compared with some other alternative investment structures that are less liquid. Essentially, interval fund managers are less limited in their investment decisions compared with some other types of funds because they don’t need to offer daily liquidity to investors. This allows fund managers to transact in less liquid markets, including alternative asset classes such as private credit, private equity, and private real estate.
An interval fund can invest in illiquid assets whereas traditional mutual funds cannot hold more than 15% of their assets in illiquid investments. Investments in private markets could potentially help enhance returns or income, and they may help diversify a portfolio by generating less-correlated returns to traditional investments with private alternatives.
Accessing alternative investments through an interval fund may offer several additional benefits:
Fewer eligibility requirements. Unlike other private alternatives, investors don’t need to satisfy eligibility requirements relating to their income or net worth.
Lower investment minimums. Although interval funds usually have higher minimum investments than traditional investments, such as mutual funds and ETFs, they tend to have lower minimums than alternatives that invest in private markets.
Familiar tax reporting. Like a traditional mutual fund or ETF, investors will receive a Form 1099 from the IRS.
Interval fund risks
In addition to many of the risks associated with traditional investments, accessing alternative investments through an interval fund can have unique risks and considerations:
Higher risk. Since interval funds can invest in less-liquid alternative assets, such as private equity, real estate, or debt instruments, these funds may carry higher levels of liquidity risk.
Complexity. Evaluating interval funds, like other alternative investment opportunities, can be relatively complex. A higher degree of investment analysis may be required before investing.
Limited liquidity. Interval fund investors are generally only allowed to sell their shares back to the fund periodically in accordance with each fund’s repurchase program. Investors cannot sell shares on an exchange like traditional mutual funds. There is no guarantee that an investor will be able to sell all their shares at a given time, or that they will have their entire redemption request fulfilled.
Fees. Interval funds, like other alternatives, may have fees and fee structures that differ from traditional investments. Interval funds have higher fees than ETFs and mutual funds (with that said, the fees are often lower than those charged by investments in private alternatives). Common interval fund fees can include management fees, service fees, and sales loads. These fees may result in relatively higher costs for investors. The specific fees and expenses associated with any particular fund can differ. Investors who are considering a specific interval fund should refer to the fund prospectus for more information.
Higher investment minimums. Compared to traditional investments, interval funds tend to have higher investment minimums.
Offered at NAV. Interval funds are always offered at net asset value (NAV)—the per-share value of a fund's assets minus its liabilities—and can continuously offer the purchase of shares. This differs from listed closed-end funds, which can trade at a discount or premium to NAV once listed on an exchange.
Periodic liquidity
Let’s dive deeper into the periodic, or intermittent, liquidity aspect of interval funds.
Unlike private alternatives, interval funds offer periodic liquidity only at specified intervals that may be monthly, quarterly, semi-annually, or annually. Basically, this means that, at different points after you make your initial investment, these funds may offer share repurchase programs that allow you to redeem a portion of your investment, often known as repurchase offers. The range of shares offered during a repurchase for all interval funds is 5% to 25% of outstanding shares.
The details of how shares can be redeemed are a bit complicated. But if you are interested in knowing how it’s done, here’s a quick rundown.
- During a repurchase offer, repurchases offered by the fund take place at the NAV on the day of the repurchase.
- Investors are not required to sell back shares during any repurchase offer.
- Interval funds can specify a limit to repurchase during any single interval.
- If the repurchase requests from investors exceed the repurchase limit, their repurchase amounts may be prorated.
What’s the benefit of periodic liquidity? In exchange for not being able to access your investment daily, interval funds may offer the potential for higher returns. At the same time, your investment may not be locked up for as long as it might be with other illiquid alternatives strategies.
Are interval funds right for you?
When thinking about any type of investment, always remember that your investing goals and constraints are unique to you. Interval funds can provide unique opportunities to achieve specific investment objectives. These investment vehicles may be worth considering if you are interested in alternatives, want to expand your universe of choices, and are focused on the long term.