Interval Fund Basics
The structure of an investment vehicle plays an important role in product development, as it can affect the success of the underlying investment strategy.
There are a number of registered fund structures, each with potential benefits and potential risks. Interval funds combine elements of various common investment vehicles and bring them together in a way that can be supportive of both long-term investment strategies and investor needs.
The following includes an overview of various fund structures and explores the roles interval funds play in the universe of registered funds.
A closed-end fund is a publicly traded investment company that raises a fixed amount of capital at one time through an initial public offering (IPO). It is structured, listed, and traded like a stock on a stock exchange, with the share price determined by market value.
An open-end fund is a type of mutual fund that can continuously issue new shares. The funds buy back shares when investors wish to redeem. Shares are purchased and sold at a price based on the fund’s net asset value (NAV).
An interval fund is legally classified as a closed-end fund, however it is different from a traditional closed-end fund. Interval funds offer daily investments; however, only a certain percentage of shares are available for redemption at predetermined intervals. Similar to the open-end structure, share price is determined by the fund’s NAV.
A non-traded fund, such as a non-traded business development company (BDC) or a non-traded real estate investment trust (REIT), is a continuously offered fund that does not trade on a securities exchange. Non-traded funds can be illiquid for long periods of time and offer limited redemptions. Investors typically seek non-traded funds as a long-term investment for income distribution.
Open-end funds, which many investors know as mutual funds, are commonplace in the investment industry. They are often contrasted with closed-end funds, which typically target a more sophisticated audience, with different risk profiles and liquidity characteristics. Each offers distinct features that, depending on individual investment objectives and the underlying strategy, can be beneficial.
Interval funds provide a structure that incorporates aspects of both open- and closed-end funds. Interval funds allow daily investments; however, they only offer periodic redemptions (typically quarterly) through a repurchase offer program.
By offering periodic redemptions rather than daily redemptions the fund can invest in more illiquid, higher-risk assets, which are more suitable to long-term investors. This makes interval funds similar to non-traded funds, another type of investment vehicle; however, unlike non-traded funds, interval funds must offer at least 5% at each quarterly redemption.