Interval funds have gained traction among investors who believe that the stock market is approaching all time high valuations and attractive yields in the bond market are hard to find. Interval funds enable investors to gain exposure to equity and fixed income opportunities among non-public companies or other less traditional investments without the high minimums and strict qualifications of hedge funds, private equity funds and venture capital funds.

Interval funds are often compared to traditional closed-end funds and open-end alternative investment mutual funds, but there are important differences, particularly in the way shares are purchased and redeemed. Prospective investors need to understand these nuances.

What Are Interval Funds?

Interval funds are categorized by the Securities and Exchange Commission (SEC) as closed-end investment companies organized and regulated under the provisions of the Investment Company Act of 1940, which also regulates open-end mutual funds and exchange traded funds (ETFs).

Like traditional closed-end funds, interval funds are structured to enable investment in less-liquid equity, fixed-income and real estate securities issued by public and private companies. Interval Funds can also utilize leverage in their investment process.

Their categorization as “closed-end,” however, is a bit of a misnomer. True closed-end funds only issue a finite number of shares that are traded on secondary exchanges like stocks. Interval funds, on the other hand, can continuously issue shares, and, like open-end mutual funds, investors purchase shares directly from the fund at their net asset value (NAV).

Then why are interval funds categorized as “closed-end?” Because of their restrictive redemption policies. While investors in open-end funds can redeem shares at any time, interval funds may limit the repurchase of shares to once per month or quarter, and they’re not obligated to fulfill all redemption requests. This limited redemption process gives interval funds greater flexibility to keep assets invested in less-liquid opportunities that may take extended timeframes to generate returns.

Differentiated Portfolios

The SEC authorized the creation of interval funds in 1992, mainly as a way of allowing closed-end funds to continuously issue shares that could be purchased and redeemed at NAV.

For their first two decades, growth in the category was relatively slow, but interest began to pick up after the recession of 2008-2009. According to Interval Fund Tracker, total assets under management in interval funds grew from less than $10 billion in 2010 to over $35 billion at the end of 2020.

Interval funds have become a popular way for investors to allocate to alternative investments within their portfolios.

Their closed-end structure enables interval funds to allocate their invested capital in less-liquid securities or debt obligations. Many interval funds invest in private companies ranging from startups to late-stage growth companies. Others invest in real estate, commercial loans, and distressed debt. Some invest in hedge funds, venture capital funds, private equity funds and special purpose acquisition companies (SPACs). Others have multi-asset class mandates that allow them to build a diversified portfolio of low-liquidity investments.

Investor Considerations: Potential Benefits and Risks

Besides being comfortable with investing in non-traditional securities and understanding interval funds’ redemption limitations, investors should also be aware of the potential benefits and risks of the asset classes, companies and sectors the fund invests in.

Interval funds give investors the ability to grow their money from less-liquid investment opportunities without the sometimes million-dollar investment minimums of unregistered alternative investment funds such as hedge funds and private equity funds.

Because interval funds must disclose their holdings and performance metrics on at least a quarterly basis, they may offer a higher level of transparency than unregistered funds.

In exchange for gaining greater exposure to less-liquid asset classes, interval fund investors must be willing to accept a higher degree of risk.

In addition to the risks that come with exposure to non-public securities, the limited redemption process for interval funds may create issues for investors who need access to their capital for emergencies or other purposes. Before a scheduled quarterly redemption window, the interval fund notifies investors of the percentage of the fund’s total shares (usually 5% to 25%) that investor may request to redeem. The NAV for redeemable shares is the NAV on the date of the redemption.

In addition, because many of the private securities’ interval funds may invest in aren’t subject to public disclosure requirements, it may be difficult for investors to get detailed financial information about these holdings. Thus, interval funds may not be appropriate for investors who are risk-averse or have short investment horizons. It may take years for the private securities these funds invest in to enter the public markets or become profitable.

Investors should also gauge the expertise of the fund’s portfolio manager and the processes they use to research and evaluate less-liquid equity and fixed income opportunities.

And it’s important to remember that interval funds usually have higher costs than open-end mutual funds. According to Morningstar, management fees for interval funds can range from 1.5% to 2.45%. In addition, redemption fees can be 2% of proceeds, service fees can be about 0.25%, and operating fees about 0.75%. However, these fees may be less than other vehicles such as hedge funds or private funds that also provide access to these types of securities.

Comparing Alternatives

Interval funds are often compared to traditional closed-end funds and open-end alternative investment mutual funds. While all of these funds can invest in less-liquid securities and may use leveraging strategies, interval funds may offer an ideal mid-point between these two categories.

Unlike closed-end funds, which issue a finite number of exchange-traded shares, interval funds can continuously create new shares that investors purchase directly from the fund at NAV. This may help minimize share price volatility. Also, interval funds trade at NAV, whereas closed end funds whose shares are issued and then only trade on secondary markets may trade at significant discounts or premiums to NAV.

INTERVAL FUNDS VS CLOSED-ENDED, OPEN-END ALTERNATIVE INVESTMENT FUNDS

 

INTERVAL funds

 

CLOSED-END funds

 

Open-end alternative investment funds

SEC 1940 Act fund Yes Yes Yes
Minimum percentage of fund assets that must always be available for redemptions None None 15%
Level of access to low-liquidity/private investments High High Moderate
Level of leverage flexibility High High Low to moderate
Ability to continuously issue new shares Yes NO Yes
How shares are purchased and sold/redeemed Directly at NAV On exchanges Directly at NAV
Investment minimums As low as $2,500 Not applicable $2,500 or possibly less for retirement accounts
When investors can purchase shares Daily, Monthly (varies by Fund) Daily Daily
When investors can sell/redeem shares Limited; usually monthly or quarterly Daily Daily

An Accessible Alternative

In summary, for sophisticated investors who seek the potential long-term growth benefits of private securities with uncorrelated return streams or are looking for higher yields than those currently available from investment-grade bonds, interval funds may offer a more accessible, affordable, and transparent alternative to unregistered hedge funds and private equity funds.

Investing in interval funds requires a willingness to sacrifice immediate access to invested capital in exchange for potential excess returns, which is why they may be most suitable for risk-tolerant investors who are willing to stick with them over the long run.

While many interval funds pursue opportunities across many different industries, some focus on specific sectors. For example, The Private Shares Fund, advised by Liberty Street Advisors, invests primarily in late-stage private growth companies in the high-tech and technology enabled sectors. Many of these companies are “unicorns”—i.e., highly profitable private companies with valuations of $1 billion or more that have established product lines and client bases. As potential future merger or acquisition or IPO candidates, these companies may possess the more mature fundamentals of many smaller public companies.

Learn more about the fund at www.privatesharesfund.com.

About Liberty Street

The Liberty Street Funds offer investors and financial advisors mutual funds sub-advised by independent boutique managers who possess expertise in their asset class. Because Liberty Street focuses on boutique managers, financial advisors can provide value-added strategies in actively managed and less-correlated portfolios to their clients. Through its selective multi-manager family of funds, Liberty Street provides access to timely investment strategies. The Liberty Street Funds are based in New York City, NY and advised by Liberty Street Advisors, Inc.

About Timothy Reick

Timothy Reick is the Chief Executive Officer and a founding member of the HRC Financial Group of companies, which includes Liberty Street Advisors, Inc., HRC Fund Associates, LLC, and HRC Portfolio Solutions, LLC. Throughout Timothy’s, 25+ years in the industry and 12+ years since founding Liberty Street, he has had an exclusive focus of representing or working with boutique managers. His keen perspective not only on existing allocations but also on identifying emerging investment strategies has resulted in the creation of multiple successful funds at Liberty Street.

For financial professionals who would like more information about how the Liberty Street family of funds may assist in building timely, value-added and differentiated portfolios for your clients, please contact HRC Fund Associates, LLC (member FINRA and SIPC) at libertystreetfunds@hrcfinancialgroup.com or 212-240-9726.

Important Disclosure

As of December 9, 2020, Liberty Street Advisors, Inc. became the adviser to the Fund. The Fund’s portfolio managers did not change. Effective April 30, 2021, the Fund changed its name from the “SharesPost 100 Fund” to “The Private Shares Fund.” Effective July 7, 2021, the Fund made changes to its investment strategy. In addition to directly investing in private companies, the Fund may also invest in private investments in public equity (“PIPEs”) where the issuer is a special purpose acquisition company (“SPAC”), and profit sharing agreements. The Fund’s investment thesis has not changed.   

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus with this and other information about The Private Shares Fund (the “Fund”), please download here, or call 1-800-834-8707. Read the prospectus carefully before investing.

Investment in the Fund involves substantial risk. The Fund is not suitable for investors who cannot bear the risk of loss of all or part of their investment. The Fund is appropriate only for investors who can tolerate a high degree of risk and do not require a liquid investment. The Fund has no history of public trading and investors should not expect to sell shares other than through the Fund’s repurchase policy regardless of how the Fund performs. The Fund does not intend to list its shares on any exchange and does not expect a secondary market to develop.

All investing involves risk including the possible loss of principal. Shares in the Fund are highly illiquid, and can be sold by shareholders only in the quarterly repurchase program of the Fund which allows for up to 5% of the Fund’s outstanding shares at NAV to be redeemed each quarter. Due to transfer restrictions and the illiquid nature of the Fund’s investments, you may not be able to sell your shares when, or in the amount that, you desire. The Fund intends to primarily invest in securities of private, late-stage, venture-backed growth companies. There are significant potential risks relating to investing in such securities. Because most of the securities in which the Fund invests are not publicly traded, the Fund’s investments will be valued by Liberty Street Advisors, Inc. (the “Investment Adviser”) pursuant to fair valuation procedures and methodologies adopted by the Board of Trustees. While the Fund and the Investment Adviser will use good faith efforts to determine the fair value of the Fund’s securities, value will be based on the parameters set forth by the prospectus. As a consequence, the value of the securities, and therefore the Fund’s Net Asset Value (NAV), may vary. There are significant potential risks associated with investing in venture capital and private equity-backed companies with complex capital structures. The Fund focuses its investments in a limited number of securities, which could subject it to greater risk than that of a larger, more varied portfolio. There is a greater focus in technology securities that could adversely affect the Fund’s performance. The Fund is a non-diversified investment company, and as such, the Fund may invest a greater percentage of its assets in the securities of a smaller number of issuers than a diversified fund. The Fund’s quarterly repurchase policy may require the Fund to liquidate portfolio holdings earlier than the Investment Adviser would otherwise do so and may also result in an increase in the Fund’s expense ratio. Portfolio holdings of private companies that become publicly traded likely will be subject to more volatile market fluctuations than when private, and the Fund may not be able to sell shares at favorable prices. Such companies frequently impose lock-ups that would prohibit the Fund from selling shares for a period of time after an initial public offering (IPO).  Market prices of public securities held by the Fund may decline substantially before the Investment Adviser is able to sell the securities.  The Fund may invest in private securities utilizing special purpose vehicles (“SPV”s), private investments in public equity (“PIPE”) transactions where the issuer is a special purpose acquisition company (“SPAC”), and profit sharing agreements.  The Fund will bear its pro rata portion of expenses on investments in SPVs or similar investment structures and will have no direct claim against underlying portfolio companies. PIPE transactions involve price risk, market risk, expense risk, and the Fund may not be able to sell the securities due to lock-ups or restrictions. Profit sharing agreements may expose the Fund to certain risks, including that the agreements could reduce the gain the Fund otherwise would have achieved on its investment, may be difficult to value and may result in contractual disputes. Certain conflicts of interest involving the Fund and its affiliates could impact the Fund’s investment returns and limit the flexibility of its investment policies. This is not a complete enumeration of the Fund’s risks. Please read the Fund prospectus for other risk factors related to the Fund.

Companies that may be referenced on this website are privately-held companies. Shares of these privately-held companies do not trade on any national securities exchange, and there is no guarantee that the shares of these companies will ever be traded on any national securities exchange.

The Fund is distributed by FORESIDE FUND SERVICES, LLC