Interval Funds
- Posted on October 31, 2022
- Financial Terms
- By Glory
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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