Interval funds have gained traction among investors who believe that the stock market is approaching all time high valuations and attractive yields in the bond market are hard to find. Interval funds enable investors to gain exposure to equity and fixed income opportunities among non-public companies or other less traditional investments without the high minimums and strict qualifications of hedge funds, private equity funds and venture capital funds.
Interval funds are often compared to traditional closed-end funds and open-end alternative investment mutual funds, but there are important differences, particularly in the way shares are purchased and redeemed. Prospective investors need to understand these nuances.
Interval funds are categorized by the Securities and Exchange Commission (SEC) as closed-end investment companies organized and regulated under the provisions of the Investment Company Act of 1940, which also regulates open-end mutual funds and exchange traded funds (ETFs).
Like traditional closed-end funds, interval funds are structured to enable investment in less-liquid equity, fixed-income and real estate securities issued by public and private companies. Interval Funds can also utilize leverage in their investment process.
Their categorization as “closed-end,” however, is a bit of a misnomer. True closed-end funds only issue a finite number of shares that are traded on secondary exchanges like stocks. Interval funds, on the other hand, can continuously issue shares, and, like open-end mutual funds, investors purchase shares directly from the fund at their net asset value (NAV).
Then why are interval funds categorized as “closed-end?” Because of their restrictive redemption policies. While investors in open-end funds can redeem shares at any time, interval funds may limit the repurchase of shares to once per month or quarter, and they’re not obligated to fulfill all redemption requests. This limited redemption process gives interval funds greater flexibility to keep assets invested in less-liquid opportunities that may take extended timeframes to generate returns.
The SEC authorized the creation of interval funds in 1992, mainly as a way of allowing closed-end funds to continuously issue shares that could be purchased and redeemed at NAV.
For their first two decades, growth in the category was relatively slow, but interest began to pick up after the recession of 2008-2009. According to Interval Fund Tracker, total assets under management in interval funds grew from less than $10 billion in 2010 to over $35 billion at the end of 2020.
Interval funds have become a popular way for investors to allocate to alternative investments within their portfolios.
Their closed-end structure enables interval funds to allocate their invested capital in less-liquid securities or debt obligations. Many interval funds invest in private companies ranging from startups to late-stage growth companies. Others invest in real estate, commercial loans, and distressed debt. Some invest in hedge funds, venture capital funds, private equity funds and special purpose acquisition companies (SPACs). Others have multi-asset class mandates that allow them to build a diversified portfolio of low-liquidity investments.
Besides being comfortable with investing in non-traditional securities and understanding interval funds’ redemption limitations, investors should also be aware of the potential benefits and risks of the asset classes, companies and sectors the fund invests in.
Interval funds give investors the ability to grow their money from less-liquid investment opportunities without the sometimes million-dollar investment minimums of unregistered alternative investment funds such as hedge funds and private equity funds.
Because interval funds must disclose their holdings and performance metrics on at least a quarterly basis, they may offer a higher level of transparency than unregistered funds.
In exchange for gaining greater exposure to less-liquid asset classes, interval fund investors must be willing to accept a higher degree of risk.
In addition to the risks that come with exposure to non-public securities, the limited redemption process for interval funds may create issues for investors who need access to their capital for emergencies or other purposes. Before a scheduled quarterly redemption window, the interval fund notifies investors of the percentage of the fund’s total shares (usually 5% to 25%) that investor may request to redeem. The NAV for redeemable shares is the NAV on the date of the redemption.
In addition, because many of the private securities’ interval funds may invest in aren’t subject to public disclosure requirements, it may be difficult for investors to get detailed financial information about these holdings. Thus, interval funds may not be appropriate for investors who are risk-averse or have short investment horizons. It may take years for the private securities these funds invest in to enter the public markets or become profitable.
Investors should also gauge the expertise of the fund’s portfolio manager and the processes they use to research and evaluate less-liquid equity and fixed income opportunities.
And it’s important to remember that interval funds usually have higher costs than open-end mutual funds. According to Morningstar, management fees for interval funds can range from 1.5% to 2.45%. In addition, redemption fees can be 2% of proceeds, service fees can be about 0.25%, and operating fees about 0.75%. However, these fees may be less than other vehicles such as hedge funds or private funds that also provide access to these types of securities.
Interval funds are often compared to traditional closed-end funds and open-end alternative investment mutual funds. While all of these funds can invest in less-liquid securities and may use leveraging strategies, interval funds may offer an ideal mid-point between these two categories.
Unlike closed-end funds, which issue a finite number of exchange-traded shares, interval funds can continuously create new shares that investors purchase directly from the fund at NAV. This may help minimize share price volatility. Also, interval funds trade at NAV, whereas closed end funds whose shares are issued and then only trade on secondary markets may trade at significant discounts or premiums to NAV.
|INTERVAL funds||CLOSED-END funds||Open-end alternative investment funds|
|SEC 1940 Act fund||Yes||Yes||Yes|
|Minimum percentage of fund assets that must always be available for redemptions||None||None||15%|
|Level of access to low-liquidity/private investments||High||High||Moderate|
|Level of leverage flexibility||High||High||Low to moderate|
|Ability to continuously issue new shares||Yes||NO||Yes|
|How shares are purchased and sold/redeemed||Directly at NAV||On exchanges||Directly at NAV|
|Investment minimums||As low as $2,500||Not applicable||$2,500 or possibly less for retirement accounts|
|When investors can purchase shares||Daily, Monthly (varies by Fund)||Daily||Daily|
|When investors can sell/redeem shares||Limited; usually monthly or quarterly||Daily||Daily|
In summary, for sophisticated investors who seek the potential long-term growth benefits of private securities with uncorrelated return streams or are looking for higher yields than those currently available from investment-grade bonds, interval funds may offer a more accessible, affordable, and transparent alternative to unregistered hedge funds and private equity funds.
Investing in interval funds requires a willingness to sacrifice immediate access to invested capital in exchange for potential excess returns, which is why they may be most suitable for risk-tolerant investors who are willing to stick with them over the long run.
While many interval funds pursue opportunities across many different industries, some focus on specific sectors. For example, The Private Shares Fund, advised by Liberty Street Advisors, invests primarily in late-stage private growth companies in the high-tech and technology enabled sectors. Many of these companies are “unicorns”—i.e., highly profitable private companies with valuations of $1 billion or more that have established product lines and client bases. As potential future merger or acquisition or IPO candidates, these companies may possess the more mature fundamentals of many smaller public companies.
The Liberty Street Funds offer investors and financial advisors mutual funds sub-advised by independent boutique managers who possess expertise in their asset class. Because Liberty Street focuses on boutique managers, financial advisors can provide value-added strategies in actively managed and less-correlated portfolios to their clients. Through its selective multi-manager family of funds, Liberty Street provides access to timely investment strategies. The Liberty Street Funds are based in New York City, NY and advised by Liberty Street Advisors, Inc.
Timothy Reick is the Chief Executive Officer and a founding member of the HRC Financial Group of companies, which includes Liberty Street Advisors, Inc., HRC Fund Associates, LLC, and HRC Portfolio Solutions, LLC. Throughout Timothy’s, 25+ years in the industry and 12+ years since founding Liberty Street, he has had an exclusive focus of representing or working with boutique managers. His keen perspective not only on existing allocations but also on identifying emerging investment strategies has resulted in the creation of multiple successful funds at Liberty Street.
For financial professionals who would like more information about how the Liberty Street family of funds may assist in building timely, value-added and differentiated portfolios for your clients, please contact HRC Fund Associates, LLC (member FINRA and SIPC) at firstname.lastname@example.org or 212-240-9726.