Alternative investing: what are interval funds?

What are interval funds?

One of the most unusual features of an interval fund is that it retains features of both a closed-end and an open-end mutual fund.

Although these funds are legally structured as closed-end funds, investors can invest in them in the same way as open-end mutual funds―shares of these funds are issued on an ongoing basis.

That said, because they’re unlisted, shares of interval funds aren’t traded on an exchange or the secondary market. Instead, interval funds offer to buy back a percentage of outstanding shares at predetermined intervals―monthly, quarterly, biannually, or annually―at a price based on net asset value. 

What are the potential benefits of investing in interval funds?

The main appeal of interval funds lies with the promise of potentially higher returns relative to mainstream open-end mutual funds; however, these funds have other traits that investors could find attractive as well.  

• Potential higher returns―Freed from the need to provide daily liquidity (and therefore the constraints associated with meeting ongoing redemption requests), portfolio managers of interval funds are able to invest in less liquid assets that typically offer―unsurprisingly―higher returns. This could explain why the majority of interval funds tends to be focused on real estate and credit.
• Less likely to be affected by short bursts of market volatility―The relatively less liquid nature of interval funds also means that they’re likely to be less affected by daily fluctuations in the financial markets. In a sense, the structure of interval funds stops investors from reacting to a spike in volatility sparked by short-lived market events and cash out their investments when valuations hit a temporary low.
• Access institutional-grade strategy―Interval funds can be seen as a straightforward way for retail investors to access institutional-grade investment strategies and assets. The minimum investment required tends to be lower than private funds, making them much more accessible and appealing, particularly for investors with longer investment horizons. 

Are interval funds for everyone? Factors to consider

As the Financial Industry Regulatory Authority noted, these funds are called interval funds for a reason: Investors are only able to exit their investments during the stipulated redemption windows. Crucially, there are limits on the number of shares that the funds would purchase from investors in each redemption window. As such, interval funds may be better suited for investors with a longer investment time horizon and those who are less likely to experience a cash crunch in the near term.

Generally speaking, it’s fair to say that fees for interval funds are typically higher than those for mainstream open-end mutual funds. Investors should be sure to comb through the relevant fund prospectus to get a more thorough understanding of the different types of fees and expenses they may have to pay, including redemption fees.

Alternative investing: know what you’re investing in

While alternative investments may appeal to investors because of the higher level of potential returns, it’s worth noting that these strategies tend to carry higher risks. There are also many different investment vehicles that provide investors with access to alternative strategies, so it’s crucial for investors to understand the differences and accompanying potential benefits and risks of each.

In other words, before committing to investing in alternatives, investors should have a thorough understanding of what they’re investing in and the objectives they’re trying to achieve through the investment. A financial professional will be well placed to provide a more detailed explanation of alternative investments and the role that these products can play in a portfolio.