An Introduction to Interval Funds

November 29, 2017 | Beth Glavosek | Blue Vault

Closed-end interval funds are a relatively new way for investors to participate in alternative investments like real estate. But what are they, and how are they different from other real estate offerings?

Interval funds are SEC-registered closed-end funds that provide continuous offerings of their securities. They usually price and sell their shares daily, but do not list them on an exchange. What does this mean from a layperson’s perspective? In general, it means that investors can access the real estate and other alternative asset classes offered traditionally by closed-end funds without committing their money for an undetermined amount of time.

Interval funds are basically very similar to mutual funds, but with a few differences.

What’s in Common with Mutual Funds

Interval funds offer shareholders and financial professionals the transparency, valuations, and investor protection elements of the 1940 Act. Some of the common elements between mutual funds and closed-end interval funds are:

• Continuous offering of shares. Interval funds are similar to mutual funds in that they continuously offer their shares at a price based on net asset value (NAV). Unlike closed-end funds and other unlisted securities, there is not a single IPO price, and there are not specific periods in which shares are offered for the public to buy.
• Regular valuations. Interval funds offer daily pricing that is reflective of regular valuations going on behind the scenes, much like mutual funds.
• Not traded on exchanges. Both are not traded on stock exchanges. That means that you can buy and sell shares directly from the mutual fund or interval fund company without having to go to a stock exchange (like the NYSE).

Differences from Mutual Funds

• Allocations to illiquid holdings. Mutual funds are NOT allowed to hold more than 15% of their assets in investments that cannot be readily liquidated or sold. This measure is intended to maximize investors’ ability to get in and out of the fund. However, closed-end interval funds are allowed more latitude in this area and may allocate much more to assets that cannot be readily sold.
• The ability to sell shares daily. While mutual fund holders can buy and sell their shares on a daily basis as much as they like, most interval funds restrict buying and selling to a quarterly basis (some only offer to repurchase semi-annually or annually), and there are limits to selling shares.

In upcoming posts, we’ll look at some other characteristics of closed-end interval funds and why they may make sense for some of today’s investors.