Interval Fund Basics

Craig EpplerFebruary 26, 2020

Investments

What is an Interval Fund?

An interval fund is an investment vehicle that periodically offers to repurchase its shares from shareholders, generally every three, six, or 12 months, instead of offering the daily liquidity available in an open-end fund. Interval funds provide investors with access to less liquid investments while attempting to provide better risk-adjusted returns. These investments include commercial real estate, consumer loans, debt, and numerous other illiquids.

Characteristics of an Interval fund

We typically use open-end funds in our portfolios. Open-end funds use pooled investor money and can issue an unlimited number of shares. Priced daily, open-end mutual funds invest primarily in stocks and bonds and allows investors to contribute or withdraw money from the fund on a daily basis. Interval funds are registered under the Investment Company Act of 1940, and have a few important characteristics:

Daily Pricing – Although they aren’t listed on an exchange, interval funds are priced daily at net asset value (NAV), similar to open-end funds.

Liquidity on periodic basis – Instead of trading on the secondary market, interval funds allow investors to redeem their shares at NAV every three, six, or 12 months.

Repurchases – If repurchase requests from investors exceed the liquidity available for the interval fund (usually 5-25% of the fund), shares will typically be repurchased on a pro rata basis.

Interval Fund Yields

The limited liquidity structure of an interval fund allows fund managers to invest without the burden of daily ongoing redemptions. By removing this liquidity constraint and allowing the manager to invest in alternative types of assets, investors may receive significantly higher returns than many open-end mutual funds.

Interval Fund Advantages

Potential higher returns than open-end mutual funds.

Their limited liquidity structure helps restrict “buy high/sell low” behavior.

Provides retail investors with access to institutional-grade alternative investments.

Relatively low minimums.

Less volatile and market reactive since investments are not tied to equities.

Interval Fund Risks

Because repurchases are completed on a pro rata basis, there is no guarantee an investor can redeem all shares during a given redemption window.

There are investment minimums, usually ranging between $2,500 and $25,000.

Generally more expensive than open-end mutual funds and ETFs.

Bottom Line

While interval funds are not risk-free, they can be a nice complement to traditional stocks and bonds as part of a diversified portfolio. They provide a differentiated risk-return profile that frequently offers investors yields that are higher than most other mutual fund options. The limited liquidity of an interval fund encourages investors to focus on the long-term nature of this investment.

HFA recently added interval funds in some of our model portfolios late last year. If you have questions, call your advisor at 610-651-2777.