Interval funds offer general investors a unique way of entering the alternative investment market. Learn what makes them attractive, how they work and why they might be the right choice for you or your clients.

The current popularity of interval funds comes as no surprise to experts. It reflects an appetite among 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.

How interval funds work 

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:

• They offer periodic liquidity to investors. 
• They aren’t commonly traded on a secondary market exchange. Instead, they can be offered to the general public or to accredited investors through private offerings.
   

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.

Investor and manager advantages

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.
 

Investor advantages

• Regulatory oversight: Interval fund investors benefit from regulatory safeguards, governance and transparency of a SEC-registered fund.
• Portfolio investments: Interval fund portfolios can provide investors with exposure to nontraditional portfolio investments and less liquid assets such as high-yield credit, distressed credit, real estate credit, convertibles and other hedge fund and private equity investments.
• Valuation: Interval fund shares are typically valued at NAV, rather than traded on a secondary market where shares may trade at a discount to NAV.
• Periodic liquidity: Interval fund investors have the option to periodically redeem shares pursuant to the fund’s repurchase guidelines.
   

Investment manager advantages

• Continuous offering: The interval fund manager can add investors and assets to a single fund without limiting the number of investors. 
• Portfolio investments: The investment manager can allocate interval fund portfolio investments across many different asset classes, some of which may be less liquid than required for other investment funds.
• Private placement: A manager may elect not to file the interval fund under the Securities Act of 1933 (1933 Act) if the shares are intended to be offered exclusively to accredited investors. In this situation, the manager may elect to charge the fund a performance fee.
• Portfolio stability: The infrequent periodic subscription and redemption process eliminates potential volatile daily cash flows that may be common to open-end mutual funds.

Regulatory requirements

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.

• Registration: Interval funds are required to register with the SEC and update the registration annually. 
• Fund governance: Similar to all mutual funds, interval funds are required to have a board of trustees that oversee all operations of the fund. 
• Portfolio holdings, leverage, compliance: Interval funds must maintain compliance with the 1940 Act. 
• Financial reporting and regulatory filings: Interval funds are required to provide shareholders with annual and semiannual financial reporting and must adhere to certain SEC filing requirements.

Converging markets

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. 

At U.S. Bank, we continuously invest in our products and services so that we can offer the right solutions to meet your needs. Learn more about the support we can provide for a variety of investment strategies and products, including mutual funds, alternative investments and exchange-traded funds.