Interval Funds

Jan 01. 05:39

What is an Interval Fund?

What is an Interval Fund?

An interval fund is a type of closed-end fund that offers its investors periodic liquidity at certain “intervals” (every three, six, or twelve months) and does not trade on the secondary market. Because things can often be defined by what they are not, let’s explore what interval funds do and do not share in common with other open- and closed-end funds.

A closed-end fund typically offers a fixed number of shares in an initial public offering; afterward, these shares are listed on an exchange and can be traded like stocks. That means the value of these shares is determined by the market, and is thus subject to fluctuation.

On the other hand, open-end funds can offer shares continuously – 401(k)s are one example of open-end funds. They purchase back shares from their investors directly, instead of trading on an exchange, so the value of shares is based on the Net Asset Value (NAV = assets less liabilities) which is calculated at the end of each day.

Because of these differences, each type of fund is subject to different laws and regulations. These regulations affect the management and performance of these types of funds. Here is a list of the main differences:

 Closed-end funds

 Open-end funds

 · No liquidity requirements

 · Must have daily liquidity in case investors cash out

 · Uses debt to raise money, higher fees

 · Lower investment minimums, lower fees

 · Riskier investments, higher yields

 · Risk-adjusted investments, lower yields

How are interval funds different from other closed-end funds?

Interval funds are a unique product in the finance world. Like an open-end fund, interval funds buy back their shares directly from their investors based on NAV instead of a market-dictated price. But they are considered a closed-end fund because they do not offer investors a chance to cash out each day.

Interval funds are like open-end funds because they can continuously offer their shares to investors. However, they do not follow the same liquidity laws as open-end funds; interval funds only offer to sell back shares to investors during scheduled time intervals, by way of repurchase offers. This offers a major cash flow advantage to interval funds, making more capital available to invest in illiquid assets with strong, stable yields.

Interval funds are also different from closed-end funds because they are not as volatile. Traditional closed-end funds trade their shares on an exchange; when the market takes a hit and stocks are down, traditional closed-end funds are hit the hardest. On the other hand, interval funds are not necessarily correlated with stock market performance, and many show steady performance through sudden market shocks.

By far, the greatest advantage of interval funds is their illiquid assets. SEC regulations used to make it impossible for the average investor to access asset classes like private loans and commercial real estate debt, leaving only large institutions or accredited investors to benefit from these securities. Today, interval funds - with palatable minimum initial investments - are expanding access to this asset class for everyday retail investors.

What this means for you

What is a Closed End Interval Fund?


Interval funds give fund managers more flexibility with liquidity, providing access to illiquid asset classes with high yields. These asset classes were once exclusive to institutional actors like large banks and pension funds. However, interval funds allow average investors to access these opportunities with low investment minimums. These investments can also perform well even when the broader market does poorly, as they aren’t correlated to any exchange. Bottom line: interval funds offer you higher yields and more manageable risk than any other type of security available.

The only potential downside of interval funds is the lack of liquidity, but this is a question of each investor's unique strategy rather than an objective weakness of the CEIF structure itself. Most interval funds only allow investors to participate in quarterly redemptions, meaning they're a poor match for investors focused on momentum trading, but still serve as powerful wealth-generating tools for investors looking to plan for the future.

If you've been stressed out by ETF volatility this year, it's worth researching interval funds that align with your values in order to stabilize your portfolio.

Featured image by Felicia Buitenwerf on Unsplash