Bill Hortz's picture

"There will be more demand, more development, more education on interval funds, especially with growing trepidation and inevitable corrections in this long running bull market." - David Carson, Ultimus Fund Solutions

[The Institute for Innovation Development recently talked with David Carson, Director of Client Strategies, for Ultimus Fund Solutions - one of the largest, independent mutual fund services and middle-office technology providers for RIAs in the country. We asked him to share with us their perspective on the growing interest in interval funds. What we find interesting about interval funds, as any relatively newer innovative tool you can use, is that you may need to tilt your head and look at it from different perspectives for a while to determine what it really is and how best to use it. Best applications may take some time to be realized. The key is in your mindset or strategic purpose in how you look at it. Is it inherently a negative (a more expensive, restrictive mutual fund) - or a positive (a more liquid, less expensive alternative product)?  Read on and we welcome your thoughts and comments below.]


Hortz: What are interval funds and how new are they as an investment option?

Carson: Though technically categorized as a type of closed end fund, interval funds are essentially a hybrid fund structure combining attractive characteristics of both closed-end and open-end funds. They allow for daily purchases/subscriptions, are often valued daily, and have a high degree of transparency and reporting like a normal open-end fund, but, in contrast, offer limited but regular pre-determined monthly, quarterly or annual redemption periods.  Unlike traditional open-end mutual funds that are restricted to 15% of illiquid investments, an interval fund can have a substantial portion of net assets in illiquid type strategies/investments, except for cash or liquid assets to satisfy pending redemptions. The structure provides money managers with a stable amount of capital to invest in less liquid investment vehicles like real estate, structured debt and other illiquid alternative investments.

Interval funds have been permitted under SEC rules for more than 20 years but with increased popularity of alternative investment products, they have been coming into their own over the last decade. They are a great example of the continuing product innovation that is being driven by the changing nature of the markets and the evolving needs and concerns of investors.

Hortz: Can you please compare and contrast cost structure and fees of interval funds with mutual funds?

Carson: Interval funds, from an SEC requirement and cost perspective, have to be in their own stand-alone trust and have their own separate board, so you do not have the option of spreading out operational fees by putting them into a series or multiple series trust format like other mutual funds. This may be something managers will be debating with the SEC about in the near future.  Also, costs can run a little higher with alternative strategies where your legal fees tend to be higher as well.  But interval funds can be substantially cheaper relative to other structures used for investing in alternatives.  During pre-determined redemption periods, interval funds can charge a redemption fee of up to 2% to discourage short term traders and those redeeming money soon after they invest.

Hortz: Why would an asset manager potentially choose this structure over others in delivering their money management services? 

Carson: The primary determining factor when managers are looking at structure is to determine to what extent their investment strategies will be employing alternative vehicles that do not fit the liquidity requirements of a traditional 40 act product. If it would be a substantial percentage, their strategy could work as an interval fund. The interval fund structure gives you the ability to use alternatives like unique credit, real estate, or insurance linked investments that don’t have the liquidity profile needed for a traditional ‘40 Act structure. That is primarily why the interval structure was created.

It is also important for asset managers to further consider their target audience. Interval funds offer more sales flexibility by having no limit to investors unlike other alternative products that are limited to accredited or qualified investors. And, if you have larger investors or institutions as your target market, they may respond favorably and have a little bit more comfort on the higher regulatory protections that interval funds would offer over some other alternative products because there would be a board and all the compliance oversight that comes with being a ’40 Act fund.

Hortz: What are the benefits and considerations regarding interval funds for an investor? Why have they been categorized by some as “not for the faint of heart”?

Carson: Interval funds provide easy access to asset classes you traditionally would not have availability to in a registered vehicle. Their primary benefit is giving you increased exposure to non-correlated asset classes.  This would be a major benefit to today’s investors that may be worried about volatility and the increasing risks in the broader markets.

As to not being for the “faint of heart,” Morningstar and other financial publications have been focusing on the limited liquidity aspects of interval funds but, like anything else, investors and their advisors have to do their research and determine their comfort level with the specific liquidity parameters, investment benefits, and subsequent impacts they provide for their portfolios. There is caution needed since they are not a daily liquid product and alternatives can be confusing, but their unique structure addresses and mitigates some of the common pitfalls in investing in the alternatives marketplace. You can almost liken interval funds to the Yale endowment approach to investing for the mutual fund world.

Hortz: I see that the trend has been 3-4 interval fund launches per quarter over the past few years. Do you see increasing adoption and discussions on the interval structure in your discussions with asset managers?

Carson: We have had more conversations with asset managers and RIAs on interval structure in this last quarter than we had in all of 2016. It had been slow to build, because they are different, and there has been a need for education on this newer structure as a tool for the investment community. But, we definitely are now seeing substantially increasing awareness and interest in them. I also think the other thing that is driving this interest is that we are now seeing interest rates going up globally and that suggests that values for bond investments will go down. There is great interest from asset managers in providing other types of income producing diversified investments that are not as impacted, or differently impacted, when interest rates rise.

Hortz: What kind of adoption rate and trends do you see with interval funds? Why do some researchers like McKinsey &Co predict they will benefit from a growing need and demand for illiquid private investments?

Carson: Per the interval tracker website, there are 43 entries being tracked with 27% being in insurance linked securities, 2nd biggest category is real estate at 25%, credit is 23%, equity is 12% and derivatives at 7% but if look at new interval funds pending in registration: 54% are in credit, a tie for second with both credit & equity and real estate at 18%, and insurance linked and real estate debt are both 4.5%. This shift I think verifies that asset managers are looking for ways to deliver income to investors from assets that are not typical bond portfolios and that is what is driving a lot of the development of interval funds; as ways to take some non-traditional income producing assets into a pooled vehicle to be better able to deliver that income to investors.

Investors are looking for yield, for income, and I think there is a general over-arching thought that we can’t continue this bull market forever. At some point things are going to turn. Also, many have bond market concerns with rising interest rates. My impression is that there is going to be a growing demand for these type of alternative strategies and more accessible alternative investment options. There will be more demand, more development, more education on interval funds, especially with growing trepidation and inevitable corrections in this long running bull market. The interval fund structure could allow for any kind of alternatives currently available, as well as for ideas that no one has thought of as of yet today.

Hortz: How would you advise financial advisers to think about and use interval funds in their client portfolios? How can they provide a differentiator or value-add to passive investing trends in the industry today?

Carson: I think advisers need to be thinking about solutions for their client’s portfolio needs and address the growing concerns about risk in the markets.  I would advise to look at how an interval fund may solve some of those portfolio construction issues. If they manage a portfolio sleeve for more protection or hedging, these are vehicles worth consideration.   

Offering interval funds can also provide a differentiator or value add for advisers and a tool to competitively address passive investment strategies or more common types of investment products. Particularly when the market declines, having something that is not going to behave like the broader market should be beneficial towards building client confidence to stay invested for the long haul and stay focused on long term goals.


The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisers and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors - Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here.


Sign Up for Your Free Innovation Newsletter