Understanding Interval Funds

What is an Interval Fund?

Interval funds are professionally managed, pooled investment vehicles that combine attractive features of both closed-end funds and traditional open-end funds. Open-end funds pool money from many investors and invest in a portfolio of securities, such as stocks and bonds, that is designed for a specific investment objective.

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Ownership of the portfolio is available to the public through shares that can be purchased or sold, hence the name “open-end”. Closed-end funds also pool money, however, they do not typically redeem shares at the option of the shareholder. Rather, closed-end fund shares usually trade on the secondary market. This structure provides asset managers with a stable amount of capital to invest in less-liquid markets, such as real estate, venture capital, and structured credit.

Interval funds share characteristics of both closed-end and open-end funds. They offer limited liquidity to shareholders by offering to repurchase a limited amount of the shares at certain “intervals,” typically every three months. Investors can purchase shares at any time, though, just like they would in an open-end fund.

INTERVAL FUNDS OFFER ACCESS

What is an Interval Fund?

Interval funds can provide individual investors access to a diversified portfolio of public and private securities. While interval funds offer many of the benefits of an open-end fund, the benefit that sets them apart is the ability to allocate more than 15% of their portfolio to private securities – a strategy institutional investors have utilized for years to:

  • Help reduce volatility.
  • Potentially increase income.
  • Lower correlation to the public markets.

INTERVAL FUNDS OFFER ACCESS

ATTRACTIVE FEATURES of INTERVAL FUNDS

Interval funds provide many of the key features of both closed-end funds and open-end funds including:

  • PORTFOLIO MANAGEMENT FLEXIBILITY: Ability to invest in private securities alongside publicly traded securities that work together to provide strong risk-adjusted returns and periodic liquidity.
  • TRANSPARENCY: Highly regulated and subject to disclosure and reporting requirements. NAV is reported daily. Purchase and redemption price are both at NAV.
  • SIMPLICITY: As easy as buying mutual funds.
  • ACCESSIBILITY: Open to all types of investors–from individuals to institutions and retirement plan accounts.
  • MULTIPLE SHARE CLASSES: Different share classes are available to help meet the varying investment objectives of individual investors.
  • LOW MINIMUMS: Typically require a low minimum investment relative to a similar portfolio that includes private as well as public securities.
  • ONGOING OFFERINGS: Continual share offerings enable investors to purchase periodically over time, which may be more convenient.
  • PERIODIC LIQUIDITY: Periodically offer to repurchase a specific percentage of shares from shareholders at specified intervals of time.
  • 1099 REPORTING: Simplified reporting and tax process. No K-1’s.

HOW INTERVAL FUNDS OPERATE

Interval funds are structured according to guidelines in the Investment Company Act of 1940, which defines roles and responsibilities for the entities that invest your money.

HOW INTERVAL FUNDS OPERATE

Although all interval funds share this basic framework, not all interval funds are created equal. Different funds may have different investment objectives and underlying securities. Some key items to consider include:

  • Strength of the investment adviser – research the fund’s investment adviser to determine their strength and reputation. It may be helpful to consider the amount of assets they have under management (AUM), their experience in the interval funds market, and the overall performance of the interval fund. A company that offers interval funds (the sponsor company) can also act as its investment adviser and keep the portfolio management duties “in house.” Self-managing the portfolio helps to ensure better risk control and more accountability, and it may lower your overall investment cost.
  • Selection of sub-advisors – investment advisers who manage interval funds may engage different companies as sub-advisors. These sub-advisors may provide additional expertise for researching investments or manage portions of a portfolio’s assets. Review the selection of sub-advisors the same way you would the strength of the investment adviser. Sub-advisors with strong historic performance that are highly reputable in the industry may have a higher likelihood of providing the fund with expertise that could contribute to better risk-adjusted returns.
  • Quality of investments and strategies – some interval funds take an institutional approach to portfolio management and adapt it for the unique needs of the individual investor. This approach helps ensure access to higher-quality assets with skilled managers, who have the expertise to select effective investments and implement a cohesive strategy.

Diversification does not eliminate the risk of experiencing investment losses. There is no assurance that the investment process will consistently lead to successful investing.

KEY TERMS FOR PERFORMANCE MEASUREMENT

The following terms may be helpful when gauging the performance of an interval fund.

  • ALPHA: Alpha is a measure of risk-adjusted return implying how much a fund/manager outperformed its benchmark, given its risk profile.
  • ANNUALIZED RETURN: The annualized return is the geometric mean of the returns with respect to one year. Annualized implies compounded returns for time periods greater than one year.
  • BETA: Beta is a measure of systematic risk (volatility), or the sensitivity of a fund to movements in a benchmark. A beta of 1 implies that you can expect the movement of a fund’s return series to match that of the benchmark used to measure beta. A value of less than 1.0 implies that the fund is less volatile than the benchmark, and a value greater than 1.0 implies that the fund is more volatile than the benchmark.
  • CORRELATION: A statistical measure of how two securities move in relation to each other. A correlation ranges from -1 to 1. A positive correlation close to 1 implies that as one security moves, either up or down, the other security will move in “lockstep,” in the same direction. A negative correlation close to -1 indicates that the securities have moved in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random.
  • CUMULATIVE RETURN: The aggregate amount that an investment has gained or lost over time, independent of the period of time involved.
  • SHARPE RATIO: The Sharpe ratio measures risk-adjusted returns by calculating the excess return (above the risk free rate) per unit of risk (standard deviation). The higher the ratio, the better the risk-adjusted returns.
  • STANDARD DEVIATION: Standard deviation of return measures the average deviations of a return series from its mean, and is often used as a measure of volatility/risk. A large standard deviation implies that there have been large swings in the return series of the manager.
  • TOTAL RETURN: When measuring performance, the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time.
  • YIELD: The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed as an annualized percentage based on the investment’s price.

LEARN MORE

Talk with your financial advisor to learn more about interval funds and for help selecting funds that may complement your portfolio.

An investment in interval funds involves risk, including loss of principal.

Investors should carefully consider the investment objectives, risks, charges and expenses of an interval fund. This and other important information about the fund is contained in a prospectus, which can be obtained by contacting your financial advisor. A prospectus should be read carefully before investing.

THIS IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. AN OFFERING IS MADE ONLY BY A PROSPECTUS. THIS LITERATURE MUST BE READ IN CONJUNCTION WITH A PROSPECTUS IN ORDER TO UNDERSTAND FULLY ALL OF THE IMPLICATIONS AND RISKS OF SECURITIES TO WHICH IT RELATES. A COPY OF A PROSPECTUS MUST BE MADE AVAILABLE TO YOU IN CONNECTION WITH AN OFFERING.