Interval funds are closed-ended mutual funds with unique characteristics that distinguish them from standard open-ended and closed-ended funds. They offer a unique combination of liquidity and long-term investment options, catering to clients seeking exposure to illiquid assets while maintaining regular access to their funds.
How Interval Funds Work
1) Structure:
- Interval funds are closed-ended funds that have set times during which investors can redeem their shares, known as “intervals.” These periods are often held regularly, semi-annually, or annually.
2) Redemption:
- Unlike traditional closed-ended funds, interval funds enable investors to redeem a part of their shares at the fund’s net asset value (NAV) at predetermined intervals. The fund must offer to repurchase a set percentage of its shares, usually between 5% and 25%.
3) Investment strategy:
- Interval funds frequently invest in illiquid or less liquid assets, including private equity, real estate, and high-yield bonds. This enables fund managers to pursue long-term investing strategies unencumbered by the need for daily liquidity.
Benefits of Interval Funds
1) Access to illiquid assets:
- Investors can acquire exposure to asset classes that traditional mutual funds normally avoid because to their illiquidity. This could potentially result in higher returns and diversification benefits.
2) Periodic Liquidity:
- Interval funds offer a blend of liquidity and long-term investing. Investors can redeem shares on a regular basis, giving them access to capital while allowing fund management to pursue less liquid opportunities.
3) Professional Management:
- These funds are managed by experienced fund managers that have the knowledge and experience to negotiate complex and less liquid markets, with the goal of providing good returns to investors.
Considerations
1) Limited Liquidity:
- While interval funds provide periodic liquidity, investors must be willing to keep their investment until the following interval for redemption. This limits flexibility as compared to open-ended mutual funds.
2) Fees:
- Interval funds may charge higher management fees due to the complexities of managing illiquid assets and the necessity for periodic valuations.
3) Valuation risks:
- The NAV of interval funds is dependent on periodic valuations of illiquid assets, which can be difficult and may not reflect current market circumstances.
Example:
An interval fund may invest in commercial real estate or private debt. Investors can purchase shares in the fund and redeem them quarterly for up to 10% of their holdings at the fund’s NAV. This allows you to possibly earn larger yields on illiquid assets while yet keeping some liquidity.
Conclusion:
Interval funds provide a distinct investing opportunity for investors seeking to reconcile the potential high returns of illiquid assets with periodic liquidity. They are appropriate for investors with a longer investment horizon who do not need instant access to their funds. While they provide access to a diverse and possibly high-yield investment portfolio, it is critical to understand the limited liquidity, increased costs, and valuation complications associated.
