Interval Funds Basics

Interval funds are non-traditional closed-end mutual funds that offer an intersection between traditional mutual funds and private funds. The five areas below outline the basics of an interval fund.

Limited Redemption Opportunities – Interval funds typically price daily at net asset value (NAV), however redemptions are limited. Rather than trade in the secondary market, they periodically offer to repurchase a percentage of outstanding shares from investors on a pro-rata basis. There is no guarantee a shareholder can redeem the desired number of shares during the redemption period, making them generally illiquid.

NSCC/AIP – Interval funds can either be offered through the National Securities Clearing Corporation (NSCC) or Alternative Investment Product (AIP) Services. NSCC is typically used by traditional mutual funds to provide clearing, settlement, risk management, and information services to the financial industry. AIP standardizes the way global market participants communicate information concerning alternative investments, removing the manual operational challenges that can be associated with these types of products.

Intermediary Onboarding – Intermediary platforms that offer interval funds alongside traditional open-end mutual funds tend to have stricter onboarding and operational requirements for alternative funds. Though they may require significant investor demand, a more extensive due diligence review, and potentially charge higher fees due to the operational restrictions associated with supporting these products the intermediaries are slightly more receptive as interval funds are more prevalent in the current market than in the past. It is essential to keep in mind that not all intermediaries support this structure for onboarding and use by their advisor base.

Attraction of Interval Funds – Since portfolio managers of these products are not concerned with meeting daily redemption requests, they are able to invest in assets or implement investment strategies that may be less liquid and more suited to longer holding periods. They also have the ability to invest in alternative types of assets, all of which lend to the possibility for higher returns than open-end mutual funds.

Education is Key – Factsheets on strategies are a baseline, but with a non- standard vehicle, developing content to educate advisors on the structure and operational complexity is critical. Intermediaries and advisors may require additional insight into the mechanics of the need for this vehicle, how it works, differences, benefits, and risks. Also, continued advocacy with industry groups such as the Broker-Dealer Advisory Committee (BDAC) at the Investment Company Institute (ICI) to innovate around improving and automating operational complexities is necessary.

How we help

We have a range of services to help you establish and maintain an effective compliance program for an interval fund. View our services here. 

For more information about how ACA can help your firm with compliance, reach out to your ACA consultant or contact us here.

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