Alternatives

A Primer on Interval Funds

A Primer on Interval Funds
clock
2 min 4 sec

Over the past several years, as managers have struggled to retain assets in active products and investors have flooded into all forms of alternatives, the investing industry has witnessed growing popularity in a structure that has actually been around for some time—the interval fund. A number of notable managers have recently launched interval fund products, and total net assets hit $27.2 billion as of the first quarter of 2019, according to Interval Fund Tracker, up 27% compared to the same period in the prior year, and more than double figures reported in the first quarter of 2017.

The interval fund structure was established in 1993 via SEC Rule 23c-3 in response to complaints about the very large market discounts to net asset value (NAV) that frequently surface with closed-end funds. The name refers to the fact that these funds are required to provide investors with limited liquidity at certain intervals through a formal repurchase process of a select percentage of fund shares: between 5% and 25% (though typically at the more conservative end of this spectrum). This timing feature must be built into a policy document at the initiation of the fund and can only be changed by shareholder vote. Additionally, when requests for redemptions exceed this amount, the set-aside liquidity will be distributed on a pro rata basis.

For managers, the structure is appealing because they can raise assets from a broader pool of capital (compared to the vehicles utilized by most private equity, private credit, and hedge funds) and because interval funds provide access to investments/securities that would otherwise be a poor fit in a mutual fund vehicle from a liquidity-matching perspective.

For investors, the benefits of the interval fund structure include 1099 tax reporting, lower minimum investment requirements than private funds, and (as noted) the ability to access less liquid investments across a variety of alternatives categories (e.g., private credit, reinsurance, private real estate).

However, as with all investments, participants must understand the risks involved with the fund’s strategies, and carefully evaluate the fees and other related expenses, as well as the terms of the fund. As many of the interval funds in the marketplace offer the most conservative level of liquidity—5% per quarter—the obvious but important takeaway is that an investor should anticipate and be comfortable with the notion that redemption of their full investment will be subject to this constraint.

For those interested in further evaluating this space, a current snapshot of AUM by fund can be found at Interval Fund Tracker.

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Macro Trends

Macroeconomic Alphabet Soup: V, W, L, U, or K?

Kristin Bradbury
While certain sectors of the economy have rebounded more quickly than expected, the trajectory of the recovery is still unclear.
Public Markets

Equities Stage Big Rebound, While Bonds See Small Gains; Real Assets Mixed

Kristin Bradbury
ESG

How ESG-Minded Investors Can Help Address the Affordable Housing Crisis

Kristin Bradbury
Institutional investors with a focus on environmental, social, and governance (ESG) investing can help address the housing crisis through investment o...
Public Markets

Stocks Rebound in 2Q20; Fixed Income Sees More Modest Returns

Kristin Bradbury
U.S. stocks posted double-digit returns, with big gains in global ex-U.S. markets. Treasuries were range-bound during the quarter and most fixed incom...
Operations

Main Street vs. Wall Street

Kristin Bradbury
While Wall Street was in celebration mode, much of Main Street continued to suffer. Against the backdrop of stellar asset price performance, rising ca...
ESG

Fixed Income Market Offers Many Options for ESG Investors

Kristin Bradbury
More investment managers are applying ESG analysis to bonds, and many have developed customized ESG frameworks to specifically evaluate various segmen...
Macro Trends

Why Bankruptcies by States Are Unlikely

Kristin Bradbury
Private Markets

Toughest Quarter Since GFC for Real Assets

David Welsch
Public Markets

U.S. Treasuries the Lone Safe Haven in a Rocky First Quarter

Kristin Bradbury
Public Markets

Pandemic Fears Roil Equities Across the Board

Kristin Bradbury

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.