The popularity of interval funds has seen a steady rise recently. According to Interval Fund Tracker: “Net assets in the interval fund sector have increased 50% in the past year [as of October 1, 2018]…. Total interval net assets equaled $26.2 billion as of the most recent public filings.”
This growth comes as no surprise to experts. It reflects the current appetite of investors for nontraditional assets within the transparent, regulated structure of a Securities and Exchange Commission (SEC)-registered mutual fund.
With their regular financial reporting, compliance and governance guidelines, net asset value (NAV)-calculation regimen and portfolio visibility, interval funds present significant appeal for both investors and investment managers. Whether you’re looking to explore alternative investments options or expand your asset management business, this article will help you understand the structure, advantages and regulations of this special type of closed-end fund.
An interval fund offers the average investor a unique opportunity to enter the alternative investment market through an SEC-registered product.
A closed-end interval fund is an investment company that is registered with the SEC under the Investment Company Act of 1940 (1940 Act). Much like a typical mutual fund, investor assets are pooled into an investment portfolio and managed by an investment management firm.
However, interval funds stand out from other closed-end funds in two main ways:
Common features of closed-end interval funds include:
Subscriptions – Interval funds continuously offer shares to investors at the fund’s next determined NAV rather than solely through an initial public offering process.
Redemptions – Unlike open-end or exchange-traded closed-end funds, which can be redeemed or sold daily, interval funds offer the option to periodically repurchase shares on specified repurchase dates.
In the wake of the global financial crisis, investors have become more particular about their investment allocations and asset strategies. They still want their investments to provide attractive returns, but they also want them to be less correlated to equity markets and, as a result, more diversified.
Interval funds provide certain advantages in this regard to both investors and investment managers, depending on their objectives.
Interval funds are registered under the 1940 Act and the 1933 Act if the fund is intended to be offered to the public. Although an interval fund may include nontraditional portfolio investments, SEC registration requires that the fund regularly adhere to several different compliance requirements (e.g., portfolio diversification, concentration, liquidity, leverage, etc.).
The fund administrator tests and reports the fund and the investment manager’s compliance with each relevant requirement.
Interval funds provide unique advantages to investment managers and investors. They also demonstrate the growing convergence between the alternative investment market and the registered mutual fund industry.
Although interval funds don’t offer daily investor liquidity, these investments can provide access to nontraditional asset classes, such as real estate debt, derivatives and insurance-linked securities. They’re growing in popularity for a reason, so it’s worth examining whether they’re the right choice for you and your needs.
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