Why Interval Funds are a Sound Investment Strategy

By Kip Meadows

July 27, 2017

For the casual investor trying to figure out what type of investment makes the most sense can be a bit of a daunting task. There are many different options out there and sifting through all of them requires some patience and a significant time investment. One type of investment that’s become popular over the last few years is the interval fund. These have some clear advantages over other closed end funds and we’ll explain why we think so. If you’re looking for a secure investment with a high rate of return, investing in an interval fund may be exactly the type of investment you’re looking for.

Closed End Funds

Interval funds are closed end funds in the sense that you can’t invest in them and then pull out whenever the mood strikes. You must be willing to leave your money in the fund for a set period. The good news is there are always set intervals at which you have the option to cash out of the fund and these intervals are usually frequent – intervals typically range from one month to six months. This allows the fund manager the security of knowing they have the money to invest in the portfolio, but still provides the investor a fair degree of flexibility in managing their own portfolio.

Typically, less volatile than hedge funds

Many of the investments made within closed end interval funds are the same classes of securities private and hedge funds can invest in. The difference is the required diversification of an interval fund. While open end mutual funds limit most investments to 5% of the total portfolio, hedge funds have few restrictions. Interval funds fall in between. In most cases investments in any one security must be 15% or less, which is less diversity, more opportunity for volatility, but also more risk. By comparison interval funds are more diversified than private or hedge funds, which results typically in less volatility, less opportunity for an investment “home run”, but also less chance of one bad investment sinking your whole ship.

What’s to stop a Run on the Fund?

Another key feature of interval funds that keeps them secure is a restriction on how many investors can remove their funds in any one interval. Normally this amount is limited to somewhere between 5% and 10% of the fund’s Net Asset Value (NAV). This provides the fund’s managers with a secure source of investment longevity, to ensure the fund can continue to remain viable. While it does make these funds somewhat illiquid, but it’s a fair trade off for access to these alternative investment securities.

Net Asset Value

Unlike a traditional closed end fund that is traded on a market bid ask basis, closed end interval funds trade at net asset value, so there is no discount to market risk that is typical among closed end funds.

Assets in an Interval Fund

A lot of investors are attracted to interval funds because they are less subject to restrictions on the amount of illiquid  investments in the fund. This gives the retail investor the opportunity to participate in a more diverse type of investment in a manageable size.

A typical investor cannot invest in commercial real estate, oil and gas exploration partnerships, or private debt securities.  Many of those same investors are not eligible to participate in private funds reserved for accredited or qualified investors. Interval funds allow individual investors with relatively modest means to take advantage of these sound investments. Most interval funds do require a relatively significant investment to buy in – typically somewhere in the $10,000 to $25,000 range. This still pales in comparison to a direct investment in any of these classes of securities.

There Are Costs Involved

One main drawback to investing in interval funds is that they do have relatively higher investment management costs. This makes sense when you think about it. Less liquid asset classes require more due diligence, familiarity and monitoring; managers with this level of expertise demand higher fees.

When investing in any fund it is a good idea to make sure you understand the fee structure before you get involved. Some funds may look like a great investment because of their high rate of return or the performance history of the investment manager in that class of securities, but a lot of this can be eaten up by the extra costs involved. Your actual return from investing in an interval fund must be marginally high enough to offset the difference in fees.

Funds Are a Good Investment

When you weigh all the pros and cons of investing in interval funds, they provide a good investment option for certain investors. Yes, the fees are higher than other funds, but the opportunity for additional  return is also present.


Note: This is the first of a three-part series dedicated to answering all your questions on interval funds. The original articles appeared in USA Herald. Be sure to check back next week for an update!

By |2022-03-11T15:54:56+00:00November 5th, 2018|
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