The pros and cons of "interval funds"

You may or may not have heard of “interval funds” before.

On the surface, interval funds look like mutual funds in that they are both SEC-regulated pooled investment vehicles that allow investors to buy shares of a fund that in turn uses investors’ money to buy a big collection of different investments. 

Like mutual funds, interval funds can be purchased on a daily basis and are denoted by five-digit “tickers” that end in the letter “X.”

The selling point of interval funds is that they typically offer a higher dividend or interest yield than mutual funds. Additionally, many interval funds claim to be able to provide total returns that are uncorrelated to those of traditional asset classes. In other words, the returns of interval funds may be unrelated to the returns of stocks and bonds, which means interval funds can add diversity to your investment portfolio.

Interval funds attempt to achieve these things by investing in non-traditional assets such as physical buildings, private loans, reinsurance, non-public bonds, etc.

However, interval funds can come with steep costs. In addition to fees that are higher than those of most mutual funds, there are SIGNIFICANT restrictions around getting your money out of interval funds.

Whereas most mutual funds have annual “expense ratios” that are well below 1% per year, it’s common for interval funds to have all-in annual fees between 2 to 3%.

With regards to redemptions, virtually all mutual funds allow you to completely sell out of your holding within one business day. With interval funds, you’re only allowed to request redemptions at certain “intervals;” typically once every three, six or 12 months.

Additionally, at each redemption interval, the funds restrict aggregate redemptions to between 5-25%. In other words, if every investor in a given interval fund requests to completely redeem their holdings on a certain interval date, it’s possible they’ll all only get 5% of their shares redeemed! And then they can similarly have their redemptions restricted at each subsequent redemption interval. Do the math; it can potentially take YEARS to completely get out of an interval fund.

Interval funds aren’t necessarily good or bad. Yes, they may indeed provide relatively good returns that are uncorrelated to those of the stock or bond markets…but maybe they won’t. For example, there are many real estate-focused interval funds whose average annual returns since inception are flat, at best.

Before purchasing an interval fund, be certain you’re willing and able to leave the money invested for potentially many years. In other words, consider interval funds VERY long-term investments. Just because they look and smell like “normal” mutual funds doesn’t mean they are.

For more information on interval funds, check out my recent YouTube video, What is an Interval Fund?