Interval funds find growing popularity

January 10, 2023

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.

“Interval fund growth reflects the current appetite of investors for nontraditional assets within the transparent, regulated structure of an SEC-registered mutual fund.”

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. 

Related content

IRA vs. 401(k): What's the difference?

What types of agency accounts are available for investors?

How much money do I need to start investing?

What are alternative investments?

Do I need a financial advisor?

At your service: outsourcing loan agency work

Employee benefit plan management: trustee vs. custodian

Major purchases: How to pay for big ticket items

Saving vs. investing: What's the difference?

Investment strategies by age

Your 5-step guide to financial planning

How you can take advantage of low mortgage rates

How does inflation affect investments?

OCIO: An expanding trend in the investment industry

How do interest rates work?

How to build a financial plan that covers your savings and expenses

Asset classes explained: Cash, bonds, real estate and equities

How digital platforms streamline client onboarding for investment funds

Understanding yield vs. return

What type of investor are you?

Rule 18f-4: The limited use exception

How liquid asset secured financing helps with cash flow

The ongoing evolution of custody: Tips for renewing your custody contract

Unique requirements of large private equity firms

Key considerations for launching an ILP

A first look at the new fund of funds rule

Interval funds find growing popularity

Alternative assets: Advice for advisors

An investor’s guide to marketplace lending

MSTs: An efficient and cost-effective solution for operating a mutual fund

Mutual fund to ETF conversions: challenges and considerations

Investment management platforms: Easily enter the Irish funds market

ESG-focused investing: A closer look at the disclosure regulation

3 questions to ask your equity, quant and CTA fund administrator

The reciprocal benefits of a custodial partnership: A case study

The unsung heroes of exchange-traded funds

4 questions you should ask about your custodian

Inherent flexibility and other benefits of collective investment trusts

Alternative investments: How to track returns and meet your goals

How institutional investors can meet demand for ESG investing

4 benefits of independent loan agents

Good money habits: 6 common money mistakes to avoid

Retirement income planning: 4 steps to take

Year end tax planning tips

A guide to tax diversification in investing

Economic forecast: 3 things to know for 2024's 2nd half

Bull vs. bear market: What do they mean for you?

Start a Roth IRA for kids

Investing myths: Separating fact from fiction in investing

What Is a 401(k)?

ETF vs. mutual fund: What’s the difference?

4 times to consider rebalancing your portfolio

7 diversification strategies for your investment portfolio

Why compound annual growth matters

How to start investing: A beginner’s guide

5 questions to help you determine your investment risk tolerance

How grandparents can contribute to college funds instead of buying gifts

How to open and invest in a 529 plan

How to use debt to build wealth

4 ways to free up your budget (and your life) with a smaller home

Get more home for your money with these tips

Can you take advantage of the dead equity in your home?

4 questions to ask before you buy an investment property

Disclosures

U.S. Bank does not guarantee the products, services, or performance of its affiliates and third-party providers. 

U.S. Bank Global Fund Services is a wholly owned subsidiary of U.S. Bank N. A. Custody and lending services are offered by U.S. Bank N.A. U.S. Bank Global Fund Services (Ireland) Limited is registered in Ireland with the Companies Registration Office Reg. No. 413707 and Registered Office: 24-26 City Quay, Dublin 2, Ireland. U.S. Bank Global Fund Services (Ireland) Limited is authorised and regulated by the Central Bank of Ireland under the Investment Intermediaries Act, 1995 U.S. Bank Global Fund Services (Guernsey) Limited is licensed under the Protection of Investors Law (Bailiwick of Guernsey), 1987, as amended by the Guernsey Financial Services Commission to conduct controlled investment business in the Bailiwick of Guernsey.

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, Home Equity and Credit products are offered through U.S. Bank National Association. Deposit products are offered through U.S. Bank National Association. Member FDIC.