What Are Interval Funds?
Interval funds are a unique investment option that combines aspects of both mutual funds and closed-end funds, offering investors the potential for diversification and access to alternative assets. Unlike traditional open-end mutual funds, which allow for daily purchases and redemptions, interval funds are semi-illiquid. This means that investors can only sell shares during specific repurchase windows. These repurchase or redemption windows are typically scheduled quarterly but can occur more or less frequently. In this article, we’ll explore the fundamentals of interval funds, their benefits, and considerations to keep in mind when evaluating them as part of an investment strategy.
How Do Interval Funds Work?
One of the defining features of interval funds is their structure, which blends characteristics of both closed-end funds and open-end mutual funds. While closed-end funds generally issue a fixed number of shares, which are then traded on an exchange, interval funds are closed to redemptions except during specified intervals. These intervals allow for the repurchase of shares, but the percentage of the fund that is repurchased can vary, typically ranging from 5% to 25% of the fund’s assets during each window according to CAIS. This structure allows interval funds to invest in less liquid assets such as private equity, real estate, infrastructure and other alternative investments that are unsuitable for daily trading.
The illiquidity of interval funds, while limiting in some ways, can provide access to a more diverse set of investments and the opportunity for an illiquidity premium. These funds can hold private market assets like commercial real estate, private equity, infrastructure or hedge fund investments — assets that may offer the potential for higher returns but are typically reserved for high-net-worth individuals or institutional investors. By investing in these funds, often with smaller minimum purchases required, individual investors gain access to investment opportunities that they may not otherwise be able to participate in.
These assets have the potential to generate returns that are less correlated with traditional stock and bond markets, which help to diversify an investor’s portfolio and reduce risk.
Interval Funds Considerations and Risks
Like any investment, interval funds come with their own set of trade-offs. One of the most important things to be aware of is cost. These funds typically have higher fees than traditional mutual funds. That’s largely because they invest in complex, less liquid assets and require a higher level of expertise to manage. It takes experienced professionals to research, source, and monitor these private market investments—and that expertise doesn’t come cheap.
These higher fees don’t automatically mean a bad deal, but they do make it especially important for investors to go in with eyes wide open. Before committing, take time to read through the fund’s prospectus. Look closely at the fee structure, performance expectations, and how those costs might affect your potential returns. Understanding what you’re paying for—and why—can help you decide whether the benefits of access to alternative investments are worth the added expense.
Liquidity Limitations
Another important consideration is the potential lack of liquidity. While interval funds offer repurchase opportunities, there’s no guarantee that an investor will be able to sell all of their shares during the repurchase window due to redemption limits. These limits are designed to allow managers to maintain a longer-term horizon for their investments to return an illiquidity premium for investors. If too many investors wish to sell, the fund may only allow a portion of the requests to be fulfilled, usually 5% of the funds balance on a quarterly basis. Additionally, the price an investor receives for their shares during the repurchase period may not be known until after the repurchase is completed. This can make it difficult for investors to plan for the exact returns they’ll receive if they exit the investment.
Is an Interval Fund Right for You?
Despite these challenges, interval funds can offer significant advantages for investors willing to accept less liquidity in exchange for access to alternative investments and the possibility of higher returns. However, it’s crucial for investors to understand the specific rules governing the fund and to evaluate their own financial goals and liquidity needs before investing in an interval fund. As with any investment, thorough research and a clear understanding of the fund’s structure, fees, and potential risks are essential. Our expertise at Konza Global includes specialization in alternative investments such as interval funds. To learn more about interval funds and if they are appropriate for your portfolio, visit our website at konzaglobal.com or contact us at (913) 318-5980.
Frequently Asked Questions
What makes interval funds different from mutual funds or ETFs?
Interval funds combine features of both mutual funds and closed-end funds. Unlike mutual funds or ETFs, which offer daily liquidity, interval funds only allow redemptions during specific intervals—usually quarterly. This limited liquidity gives them the flexibility to invest in alternative assets like private equity or real estate, which aren’t easily traded on public markets.
Are interval funds a good choice for individual investors?
They can be—if you’re comfortable with limited liquidity and looking for diversification beyond traditional stocks and bonds. Interval funds offer access to private market investments that are typically out of reach for everyday investors. However, they’re best suited for those with a longer investment horizon who don’t need immediate access to their funds.
What are the biggest risks to be aware of with interval funds?
The two biggest risks are limited liquidity and higher fees. You may not be able to redeem all your shares when you want, and fees can be steeper due to the specialized nature of the assets. It’s also important to understand that returns may vary and aren’t guaranteed—so doing your homework and understanding the fund’s structure is crucial.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Konza Global Advisory, LLC in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.
The information contained in this writing should not be construed as financial or investment advice on any subject matter. Konza Global Advisory, LLC, expressly disclaims all liability regarding actions taken based on any or all the information in this writing.
