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ABC’s Of Interval Funds: An Introduction to Closed-Ended Interval Funds

by on October 2, 2018

Interval funds (iCEFs) are growing in popularity as an alternative investment vehicle. The SEC officially authorized iCEFs in 1992 as a best of both world’s alternative to closed-ended and open-ended funds. iCEFs had a slow start, the second iCEF wasn’t created until 2001 and the third fund formed in 2005. The structure is a small (0.1%) portion of the overall multitrillion dollar fund industry. However, iCEFs are growing assets quickly, in the 50% range annually with 42 current funds with a combined $28.52B in AUM as of August 31, 2018. This compares to CEF/BDC listed AUM of $280 billion in 564 funds according to

The SEC defines them as a type of Investment Company that periodically offers to repurchase shares from its shareholders. iCEFs are legally classified as closed-ended investment companies and cater to similar investors who are seeking participation in a fund that provides regular income without being subject to the same limitations as an open-ended fund, or as “locked up” as a hedge fund.

iCEFs are different from traditional CEFs in that they do not trade at market prices on stock exchanges. Instead they provide investors liquidity at regular “intervals”, most often quarterly. Most iCEFs continuously offer investors the opportunity to purchase shares directly from the fund at net asset value (NAV). This “inflow” or growth of fund assets is conceptually similar to inflows for an open-end fund. The offering price and White Paper Image 1buyback price are determined as a function of NAV. These regular “tenders” are similar to the irregular tenders sometimes pushed on CEFs by institutional or activist investors that generally require a shareholder or board vote to initiate.

The sector breakdown for existing iCEFs is 24% Loans / Structured Credit, 19% Real Estate Equity, 14% Global Credit, 15% Equity, 12% Real Estate Debt, 7% Reinsurance, 5%, Market Place Loans, 2% Venture Capital / Private Equity, and 2% Option Writing.

iCEFs provide a hybrid between mutual funds and CEFs, combining a number of the attractive features of each. There are a number of other key characteristics that make them attractive compared to traditional CEFs or mutual funds. iCEFs are often valued via a daily NAV, and have a fixed-capital outflow protection for the portfolio vs. open-end funds and exchange traded funds whose share count can change daily. iCEFs have a high degree of transparency and reporting like all 1940 Act funds. These characteristics may be attractive to investors of the fund as opposed to the traditional “lock-up” of capital in a hedge fund.

However, similar to CEFs, iCEFs are able to hold more illiquid investments than intended for open-end and exchange traded funds. For example, market place loans, farmland and private equity. This provides managers with much greater flexibility in the investment strategies they can allocate to, whereas traditional open-end funds/ETFs are restricted to less than 15% illiquid investments. Similar to both mutual funds and CEFs, iCEFs are often available to all investors and not limited to accredited investors. Minimum investments start as low as $500, and top $15MM per fund, however, only 8 funds (19%) currently require more than a $10,000 minimum investment.

They can provide easy access to uncorrelated strategies such as real estate investing for example, including for non-accredited investors. This can also allow managers to produce higher yields than open-ended funds because they don’t have the risk of daily redemption pressures. Another feature of iCEFs is the ability to raise permanent leverage or access leverage through other means, a very common feature for traditional CEFs in both equity and bond strategies.

The iCEFs average NAV yield is currently 5.4%, higher than expected in the open-end fund and ETF universe but still lower than the 7.4% found in taxable CEFs. We believe the main difference in the lower yield for iCEFs vs. traditional CEFs is twofold: one that when a CEF trades at a discount to NAV this increases the yield, and second, when a fund board of directors pushing the yield to a higher level it is a common way to reduce and often avoid deep discounts for the fund.

iCEFs have an independent board of directors (BoD) and the compliance and oversight that is associated with being a 1940 Act fund. This may offer investors more comfort compared to a less formal type of fund, for example a simple LLC or LP that invests in real estate or other sectors. iCEFs could turn off some investors as they generally have a higher fee structure compared to open-end funds and ETFs with an average iCEF expense ratio of 2.42%, slightly higher than the 2.06% for traditional listed CEFs. 12 iCEFs have expense ratios under 1.50% and only 7 have expense ratios over 3%. It should be noted that expense ratios for iCEFs and traditional CEFs included the cost of leverage. iCEF expense ratios are not as high commonly found for hedge funds when you include leverage, management and incentive fees.

Some might argue that iCEF’s limited quarterly redemptions is a weakness for the fund structure. However it’s difficult to call a key feature of the structure a weakness. This feature of the fund structure allows some liquidity while avoiding any risk of the fund trading at a discount to NAV which is common and sometime pervasive for traditional CEFs.

iCEFs have been gaining more recognition in the investment community. For example WSJ ran an article titled “What are Interval funds?” in July 2017. (The article leads off: Why would an investor want to own one? Because it’s hard for an individual to find another way to invest in the assets these funds hold.). Since January 1, 2017 there have been 18 interval funds approved by the SEC. We think the momentum for this fund structure has shifted, also the reasons we built out iCEF coverage to our existing CEF and BDC database.

Today, iCEFs are launched every few months or less. According to interval fund net assets equaled $28.52 billion as of August 31, 2018. Up from approximately $15 billion on June 30, 2017. This is likely driven by increasing acceptance from institutional investors and Registered Investment Advisors (RIAs).

The two sponsors with the fastest growing funds are Versus and Stone Ridge, each with two of the top five fastest growing funds. Moreover the pipeline of future interval fund launches remains very strong.

White Paper Image 2A sector breakdown illustrates how iCEFs provide access to alternative investments to investors who may not otherwise have access.


The rising fed funds rate may be partially responsible for driving the increasing popularity of iCEFs. Rising interest rates typically create concerns about traditional bond funds because bond portfolios will typically decline if rates rise (duration risk). This creates demand for alternative, uncorrelated income focused investments that can help diversify away from duration risk. Another reason is that we have not seen the traditional IPO of a permanent (non-term) listed CEF since September 2016. It has become harder to do a large traditional initial public offering (IPO) of CEF strategies in the current rate, discount and regulatory environment. Many traditional CEF/BDC managers and sponsors have launched or are launching iCEFs. They include: Blackstone, Destra, Invesco, NextPoint, Pioneer, PIMCO, Rivernorth, Tortoise and Voya. We believe iCEFs will continue to grow in popularity for the foreseeable future and will be an interesting sub-structure for CEF investors to monitor.

We recently did an interview with RiverNorth’s Market Place Lending Corporation (RMPLX) which primarily invests in consumer loans. You can read the issue by subscribing to The Scott: Letter Closed-End Fund Report on our website:

DISCLOSURES: makes data for the universe of closed-end funds (CEFs) and business development companies (BDCs) available to its users. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. This site does not list all the risks associated with each fund. Investors should contact a fund’s sponsor for fund-specific risk information and/or contact a financial advisor before investing.

NOTES: Distribution type sourced from For specific information about a fund’s distribution sources, visit the fund sponsor’s website. The following information applies to closed-end funds and business development companies in general: Fund shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation (FDIC). Shares of closed-end funds (CEFs) and business development companies (BDCs) are subject to investment risks, including the possible loss of principal invested. There can be no assurance that fund objectives will be achieved. Closed-end funds and business development companies frequently trade at a discount to their net asset value. NAV returns are net of fund expenses, and assume reinvestment of distributions.

This material is presented for informational purposes only. Under no circumstances is it to be considered an offer to sell, or a solicitation to buy any investment referred to on this page. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and it should not be relied upon as such. Past performance is not necessarily indicative of future results. All investments involve risk including the loss of principal. Returns are presented gross of investment management fees and other appropriate fees (i.e. commissions, custodial fees, etc.).

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