Interval Funds vary widely by strategy, but they offer individual investors access to investment strategies typically available only to institutional entities like hedge funds and pension plans. Unlike traditional mutual funds, interval funds do not provide daily liquidity for investors. Instead, they schedule periodic repurchase offers, usually quarterly, where a portion of outstanding shares can be redeemed at the fund's net asset value (NAV).
Compared to mutual funds, which allow investors to redeem shares daily based on current NAV, interval funds impose limitations on when shares can be redeemed. This structure allows portfolio managers to adopt a longer-term perspective in allocating capital, especially towards less liquid asset classes that may offer higher potential returns, called an illiquidity premium (higher than anticipated return in exchange for less liquidity). Such assets could include smaller issues of high-yield bonds, bank loans, private debt, structured products, and real estate.
Investing in interval funds entails certain risks, primarily associated with reduced liquidity. This means investors must carefully consider their investment horizon and liquidity needs before committing funds. Although legally structured and categorized as closed-end funds, interval funds differ from exchange-listed closed-end funds in that they are not traded on exchanges and do not fluctuate in price relative to NAV throughout the trading day. Instead, they are continuously offered and priced daily at NAV, with periodic opportunities for shareholders to redeem shares based on the fund's repurchase schedule.
The redemption process for interval funds requires shareholders to submit redemption requests within a specified period before the repurchase date. If the demand for redemptions exceeds what the fund can repurchase (typically at least 5% of outstanding shares), redemptions may be fulfilled on a pro rata basis. This structure emphasizes the importance of investors understanding the fund's liquidity constraints and aligning their investment goals accordingly.
STRUCTURAL CHARACTERISTICS OF INTERVAL FUNDS
|
OPEN-END FUND |
LISTED CLOSED-END FUND |
INTERVAL FUND |
TYPICAL PRIVATE FUND |
|
| 1940 Act Registered | YES | YES | YES | NO |
| Continuously Offered | YES | NO | YES | NO |
| Daily Valuations | YES | YES | YES1 | NO |
| 1099 Tax Reporting | YES | YES | YES | NO |
| No Performance Fee | YES | YES | YES1 | NO |
| No Capital Calls | YES | YES | YES | NO |
| Investor Suitability | NONE | NONE | NONE2 |
QUALIFIED PURCHASER |
| Investment Minimum | $ | $$ | $$ | $$$ |
| Liquidity | DAILY |
EXCHANGE TRADED |
PERIODIC (TYPICALLY QUARTERLY) |
PERIODIC/ILLIQUID |
| Illiquid Securities | 15% MAX | NO MAX LIMIT | 75-95% MAX3 | NO MAX LIMIT |
Source: BlackRock, as of June 2024. Managers do not have to grant the redemptions at the prescribed intervals. 1May vary by fund. 2Typically, interval funds are not legally required to impose investor suitability. However, because of their relative illiquidity, individual distributors may require clients to meet certain criteria, e.g. Accredited Investor standard. 3There may be some limitations, as funds must maintain liquid assets sufficient to meet repurchase offers.
DISCLOSURES
An interval fund provides liquidity through periodic repurchase offers, for instance, quarterly (not daily). Interval funds are designed for long-term investors and, unlike an investment in a traditional listed closed-end fund, should be considered illiquid. Investors should consider their investment goals, time horizon and risk tolerance before investing.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
General: Inherent in any investment is the potential for loss. Past performance results are not necessarily indicative of future performance results. All specific securities mentioned in this presentation are shown for illustrative purposes only. There is no guarantee that such securities will be used in the management of your portfolio as market conditions, prices or expectations of the manager may change at any time without notice. This presentation is not meant as a general guide to investing, nor as a source of any specific investment recommendations. This presentation makes no implied nor express recommendations concerning the manner in which any client’s accounts should or would be handled. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (1) the size of the account; (2) applicable investment restrictions in place, if any, and; (3) market exigencies at the time of investment. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. The investments and services to which portions of this presentation relates are only available to persons with a categorization as a qualified client, as defined under Rule 205-3 of the Investment Adviser Act of 1940, and other persons should not act or rely on it.
