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Interval Funds: A Growing Industry, but What Are They?

August 15, 2016

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Interval Funds: A Growing Industry, but What Are They?

A Primer on Interval Funds

August 16, 2016 | by Jared Schneider, Managing Partner

You may have heard the term “interval fund” frequently over the past couple years. Many broker dealers have recently brought interval funds onto their platform as of late. Much more education needs to happen in the marketplace to understand interval funds and how they work. We will delve into the terminology surrounding these newly popular funds and provide some basic education in this post.

The term “interval fund” refers more to a feature than a type of investment. Interval funds are typically closed end funds (otherwise colloquially called ’40 Act funds because they fall under the 1940 SEC Act covering closed end funds) that offer some form of regular liquidity and are not traded on a stock exchange. The liquidity comes through tender offers to shareholders at regular intervals. Those intervals can be quarterly, semi-annually or annually. The offer is based on the net asset value of the shares.

To be considered an interval fund, the repurchase offer has to be no less than five percent and no more than twenty five percent of the outstanding shares. The prospectus for each fund, under SEC file type N-2, will outline the company’s liquidity provisions. Interval funds are regulated primarily under the Investment Company Act of 1940 and the rules adopted under that Act, in particular Rule 23c-3. Interval funds are also subject to the Securities Act of 1933 and the Securities Exchange Act of 1934.

The difficult part about understanding interval funds is that they do not invest in one specific asset class or strategy. The investment strategies can range across many different asset classes. These funds might invest in real estate, real estate securities, public securities, private equity, private debt, and other investment funds. Investors really have to understand the nature of the fund’s investments because not all are created equal.

Unlike nontraded REITs which invest primarily in commercial real estate and debt related to commercial real estate, interval funds may invest in other asset classes such as futures and other derivative contracts, U.S. and foreign equities, fixed income securities, other closed-end funds, and the securities of companies involved in significant corporate events such as mergers and acquisitions. Investment positions may involve common stock, preferred stock and convertible securities.

Interval funds report their financial and operating results with the SEC. Twice a year, the funds report detailed financial operating results called the annual and semi-annual shareholder reports. The funds also have to report holdings quarterly in a filing called an N-Q.

At this point Blue Vault has counted 35 nontraded closed end funds with interval fund features that are either currently effective or are in registration.

 

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