Interval Funds

What is an Interval Fund?

An Interval Fund is a type of closed-end fund which provides investors with liquidity at predetermined intervals, usually quarterly, semiannually, or annually. This indicates that shareholders may periodically sell a percentage of their shares at a price determined by the net asset value (NAV) of the fund.

When compared to other funds, this investment is significantly less liquid due to the restrictions governing interval funds and the types of investments they own. Investors are drawn to interval funds mostly because of their high yields. 

Interval Fund Explained

Interval funds have a broad range of strategies, instruments, and asset types they can invest in. Many people have the misconception that interval funds are only relevant to one asset class, such as real estate, private equity, or corporate credit, which undervalues their ability to diversify.

An interval fund may own an unlimited number of less liquid and illiquid assets. The capacity of interval funds to invest in less liquid assets including high yield bonds, loans, as well as illiquid assets like private debt, private equity, and infrastructure investments has led to an increase of their use in the past few years.

In comparison to conventional equities and bonds, less liquid and illiquid segments of the market may provide the possibility of higher levels of income and return. Additionally, they could offer a particular benefit for diversification, such as reducing volatility or allowing access to investments with little correlation to conventional investments. Of course, the potential rewards must be compared to the risk involved in holding such assets.

Interval funds that are governed by the Investment Company Act of 1940 must submit frequent disclosures with the U.S. Securities and Exchange Commission that demonstrate a high level of transparency on their assets and business operations.

An interval fund should be viewed as a long-term investment due to the limited selling options.

Financial advisors and their investors should first assess the individual’s financial objectives before investing in interval funds. Investment restrictions including risk tolerance, liquidity requirements, and time horizon for investments should be taken into account.

Interval Fund Share Buy Backs

By regulation, interval funds are required to offer to buy back shares of the fund on a periodic basis at the NAV. The time between repurchases can be every three, six, or twelve months.

The buyback notice will include a deadline by which investors must accept the offer as well as the proportion of all outstanding shares that the fund will purchase, which is typically 5% but can occasionally reach 25%. There is no assurance you will be able to redeem the exact amount of shares you want during a specific redemption because buyback is done on a pro-rata basis.

Interval Funds vs Mutual Funds

Interval funds do not have the same liquidity limits as open-end mutual funds, which are limited to holding a small portion of their assets in less liquid and illiquid instruments.

While interval funds do offer better rates than traditional mutual funds, they also have higher fees and less liquidity. Interval funds can be a beneficial investment if an individual does not require the liquidity and the returns outweigh the fees.

Many of the advantages of mutual funds, such as low investment minimums and expertly managed portfolios, are also provided by interval funds, along with the same regulatory control.


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