What Are Interval Funds, and Why Should Trustees Care?

May 18, 2018

By Dave Carson, Ultimus Fund Solutions

With an interval fund, as with any relatively innovative tool you can use, you may need to tilt your head and look at it from different perspectives for a while to determine what it really is and how to use it. Best applications may take some time to be realized, and the key is keeping in mind your strategic purpose: Is it inherently a negative, i.e., a more expensive, restrictive mutual fund? Is it a positive, i.e., a more liquid, less expensive alternative product? 


Interval funds are, by definition, closed-end funds. But practically speaking, they are hybrid structures that combine potentially attractive characteristics of both closed-end and open-end funds. Interval funds allow for daily purchases/subscriptions, are often valued daily, and have a high degree of transparency and reporting—much like a typical open-end fund. A significant difference from the open-end structure, however, is that redemptions are by tender offer at pre-determined monthly, quarterly or annual redemption periods. Also unlike traditional open-end mutual funds that are restricted to 15% of illiquid investments, interval funds can have a substantial portion of net assets in illiquid-type strategies/investments. The structure provides money managers with a stable amount of capital to invest in less liquid investment vehicles such as real estate, structured debt, insurance-linked securities, and other alternative asset classes.


From a Securities and Exchange Commission requirement and cost perspective, interval funds must be in their own stand-alone trust. Therefore, you do not have the option of spreading out operational fees by putting them into a series or multiple-series trust format like you can with open-end mutual funds. Also, operating costs can run a little higher with alternative strategies where legal fees tend to be costlier as well. But interval funds can be substantially cheaper relative to other structures used for investing in alternatives. As is fitting for asset classes where stable capital may be desirable, interval funds are permitted to charge a redemption fee of up to 2% to discourage short-term traders and those redeeming money soon after they invest.


Finding a Level of Comfort

Interval funds provide investors straightforward access to asset classes that traditionally are not available in a registered vehicle—particularly to non-correlated asset classes. This would be a major benefit to today’s investors who may be worried about volatility and the increasing risks in the broader markets. Some commentators have described interval funds as “not being for the faint of heart,” perhaps because of the limited liquidity aspects of interval funds. But like anything else, investors and their advisers should do their research and determine their comfort level with the specific liquidity parameters, investment benefits, and subsequent impacts they provide for their portfolios. Caution certainly is warranted since interval funds are not a daily liquid product and alternatives can be confusing, but their unique structure addresses and mitigates some of the common pitfalls in investing in the alternatives marketplace. You can almost liken interval funds to the Yale University endowment approach to investing for the mutual fund world.


Interest in interval funds has been slow to build—partly because they are different—giving rise to the need for education on interval funds as a tool for the investment community. In addition, the limited redemption opportunities have been somewhat challenging for brokerage platforms that were built for daily purchases and redemptions. But interest in the structure is increasing, driven in part by the reality that interest rates are going up globally, which suggests that values for bond investments will go down. Asset managers looking to provide investors with income-producing diversified investments that are not as impacted—or are differently impacted—when interest rates rise may want to consider the interval fund structure. More accessible alternative investment options also may make sense amid growing trepidation in this long-running bull market.


Offering interval funds also can provide a differentiator or value add to advisers and a tool to competitively address passive investment strategies or more common types of investment products. Particularly when the market declines, having something that is not going to behave like the broader market should be beneficial toward building client confidence needed to stay invested for the long haul and stay focused on long-term goals.


An Alternative to ‘No’

There are several reasons trustees should be familiar with interval funds. As advisers discuss strategies that may not be well suited to open-end fund liquidity requirements, trustees have an alternative to simply saying “no”; an aware trustee could ask whether the strategy would work better as an interval fund. While interval funds do have to be organized as stand-alone trusts, nothing precludes having concurrent meetings of open-end and interval fund boards, so familiarity with the structure could be a benefit to both the adviser and the trustee from an efficiency perspective.


And all of us involved in the asset management industry are well served by helping to improve appropriate access to strategies that can help investors meet their many needs—including facilitating growth, managing risk, and generating income.

*Adapted from an interview conducted by Bill Hortz, the founder and dean of the Institute for Innovative Development, launched with support from founding sponsors that include Pershing, Voya Financial, Ultimus Fund Solutions, and Fidelity Investments.

Dave Carson is director of client strategies at Ultimus Fund Solutions and president of Ultimus Managers Trust and Unified Series Trust.



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