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.
