What’s an interval fund?

For decades, investors have used different types of structured vehicles to access investment opportunities. While mutual funds and exchange-traded funds (ETFs) are the most commonly used fund structures among financial professionals and individual investors, several other types of investment vehicles are growing in popularity and can provide access to investment opportunities less suited to traditional fund structures.
 

Interval funds, which are closed-end funds registered under The Investment Company Act of 1940, are among these vehicles that seek to bridge familiarity with opportunity.

The basics

An interval fund is a type of closed-end fund that does not trade on an exchange but is instead continuously offered similar to a mutual fund, but only allows redemptions at regular intervals and up to a certain percentage of the fund's outstanding shares, as predetermined by the fund. This results in interval funds being less liquid than traditional fund structures, meaning investors cannot sell shares as quickly as they can with mutual funds or ETFs for example, for which they generally have the ability to sell shares daily.

Investors typically use interval funds to access private market investment opportunities that are less liquid than most publicly traded stocks or bonds, such as private direct lending, asset-based finance, real estate, infrastructure or private equity (collectively known as alternative investments). The structure is intended to enable shareholders to potentially benefit from the higher expected returns of these less liquid opportunities that assume more investment risks, require longer holding periods and would be negatively impacted from short-term investor flows.

How do interval funds compare to mutual funds?

Because of the specialized types of investments within interval funds, liquidity, complexity, management fees and expenses are typically higher than the average mutual fund or ETF, but often lower than those of other private investment structures such as limited partnerships (LPs) or direct investments in a company, real estate or infrastructure development. Similarly, interval funds broaden access to investments that were typically only available to accredited or qualified investors, though they may not be appropriate for all investors. 

How interval funds compare to other investment vehicles/structures

*Investment minimums vary depending on the vehicle/fund issuer. ETFs can be traded on a fractional basis, so investment minimums can be as low as a brokerage trading platform allows. Mutual funds can be as low as $100 per share. Interval funds vary, but minimums are typically less than $10,000, whereas LPs have investment minimums that can be $1 million or more.

^†The fund must have enough liquid assets to cover share repurchases, otherwise there’s no limit.

Source: Capital Group.

Interval fund liquidity

One of the main features of interval funds is limited liquidity relative to mutual funds or ETFs. As previously mentioned, interval funds restrict the repurchase of shares by the fund from its shareholders (or “redemption” of shares) to specific periods of time in order to manage the ebbs and flows of capital coming out of the fund in order to prevent the portfolio from having to sell long-term assets at potentially discounted prices to generate cash and satisfy repurchase requests.

Interval funds offer periodic — often quarterly — repurchases of shares. At the periodic interval, the investment manager determines a percentage of the fund’s outstanding shares that it will offer to repurchase (minimum of 5%) at a specified date. After the fund board approves this repurchase offer and notifies shareholders, there’s a period — commonly 30 days — where existing shareholders can request an amount of shares they’d like the investment manager to repurchase from them. Depending on demand for repurchases, a shareholder’s request may be partially or fully fulfilled typically within two business days, but generally not more than 14 business days after the repurchase request deadline.

For some investors, the limited liquidity may seem like a significant drawback. Yet others — who can tolerate less liquidity — may consider the higher return potential as the “illiquidity premium” available to investors with a longer term investment horizon.

Interval funds are growing in popularity; now’s the time to build knowledge

The first interval fund was introduced in 1993, but for the first two decades of its existence, there were relatively few funds with only a modest amount of assets under management. However, since 2017, investment managers and investors have increasingly embraced interval funds as a way to access the growing alternative investments universe.

A confluence of factors has put more focus on interval funds recently. Alternative investment managers have long sought to bring opportunities of private markets to a broader set of investors. However, eligibility requirements, suitability and liquidity concerns have been significant hurdles for broader adoption of alternatives in investor portfolios.

Investment managers may use interval funds as a way to offer alternative investments including private credit, real estate and infrastructure to more investors as the fund structure seeks to help reduce or even remove some of the long-standing barriers to wider usage. Given this vehicle’s growing use, financial professionals may consider learning more about interval funds, their benefits, drawbacks and how they could be used in their investors’ portfolios to pursue differentiated outcomes.

Learn more about Capital Group and KKR’s partnership aimed at bringing public-private investments to financial professionals and investors.

Key terms

Mutual funds — A mutual fund is a type of investment company, also known as an open-end fund, that pools investment money to invest based on pursuing a particular investment objective. A mutual fund continuously sells and redeems shares to investors. A mutual fund is priced daily based on the underlying value of the assets it holds, also known as net asset value (NAV).

Exchange-traded funds (ETFs) — An ETF is a type of investment company that’s similar to a mutual fund because it can provide diversification, but unlike a mutual fund, it trades like a stock. Investors can purchase and sell ETF shares at the current market price in the secondary market, like a stock exchange where most stock trading occurs.

Closed-end funds — A closed-end fund is a type of investment company that pools money from shareholders to buy securities or other investments. Closed-end funds are similar to mutual funds as the professionals manage portfolios of stocks, bonds or other investments (including illiquid securities) to pursue investment goals. While mutual funds continuously sell newly issued shares and redeem outstanding shares from investors, some closed-end funds offer a fixed number of shares in an initial public offering (IPO) that are then traded on an exchange. However, in the case of an interval fund, new shares are sold continuously but share repurchases only occur at specific intervals.

The Investment Company Act of 1940 — A law that regulates investment companies and their activities. Types of investment companies covered under this act include mutual funds, ETFs, unit investment trusts and closed-end funds. Hedge funds, private equity funds and holding companies are also covered; however, some provisions of the Act make these types of investment structures exempt from registration.

Alternative investments — Alternatives comprise a wide variety of investments distinguished from publicly traded investments in stocks, bonds and cash-like instruments. The alternatives landscape includes some of the world’s oldest investments, such as real estate and commodities, as well as nontraditional vehicles including private equity, private debt and hedge funds that often employ derivatives, a type of financial contract between two parties whose value is based on an underlying asset, group of assets or an index, and leverage, which is borrowing money and investing it with the goal of amplifying potential returns, in their investing strategy.

Limited partnerships — A limited partnership is a business structure that is used by a group of individuals to pool money for the purpose of investment, often in real estate or other less liquid assets. A general partner typically runs the business, is responsible for the daily management of the partnership and assumes the liabilities of the company’s financial obligations, debts and any potential litigation. Non-general partners’ liabilities are only confined to their share of investment. Limited partnerships also serve as pass-through entities, where tax reporting requirements are the responsibility of the individual partners, not the partnership as a whole. These partnerships are typically governed by state regulations and may require registration within the state where they’re formed.

Accredited investor — An individual with a net worth of at least $1 million, excluding primary residence; with an income of more than $200,000 per year (individually) or $300,000 (with spouse or partner) for at least 2 years; or who meets certain professional criteria (e.g., an investment professional in good standing holding Series 7, Series 65 or Series 82 licenses).

Qualified purchaser — A higher bar than the accredited investor standard. For individuals, typically requires an investment portfolio worth at least $5 million.

Capital calls — A request from an investment firm (generally with private equity or venture capital) to demand a portion of the money promised to it by an investor. This may be a legal right based on a partnership or investment company agreements with investors.

Illiquidity premium — The extra return that investors may expect for holding illiquid assets, compensating them for the higher risk and potential difficulty in quickly converting the asset into cash without significantly impacting its market value.  

Capital Group and KKR are not affiliated. The two firms maintain an exclusive partnership to manage and seek to deliver public-private investment solutions to investors.