What Is an Interval Fund?
An interval fund is a non-traditional type of closed-end mutual fund that periodically offers to buy back a percentage of outstanding shares from shareholders. Shareholders are not, however, often required to sell their shares back to the fund.
This can be contrasted with traditional closed-end funds that raise a prescribed amount of capital only at one point in time, often through an IPO. After all the shares have sold, the offering is "closed" to new assets—hence, the name. No new investment capital flows into the fund.
- An interval fund is a type of pooled investment that allows the issuer to repurchase fund shares from its shareholders at certain points in time, or intervals, if the shareholder so chooses.
- Advantages to investors include generally higher returns since shares can be sold back to the fund at NAV while keeping investors' psychology in check due to limited periods of lock-up.
- Disadvantages include generally higher fees, lower liquidity, and greater product complexity or opacity than standard open- or closed-end funds.
Understanding Interval Funds
Although shares of a traditional closed-end fund may exchange on the secondary market, interval fund shares typically do not trade on the secondary market, though many interval funds do offer shares for sale at current net asset value (NAV) on a continuous basis.
Periodic repurchase offers come at preset intervals of three, six, or twelve months, as outlined in the fund’s prospectus and annual report. The repurchase price is based on the per-share NAV on a date specified (and announced in advance) by the fund. Note that most often, shareholders in the fund have the option to redeem their shares at the intervals and are not required to do so.
The repurchase announcement will specify a date by which you must accept the repurchase offer and the percentage of all outstanding shares the fund will buy—usually 5%, and sometimes up to 25%. Since repurchase is done on a pro-rata basis, there is no guarantee investors can redeem the number of shares they want during a given redemption interval.
Example of an Interval Fund
The Pimco Flexible Credit Income Fund, which aims to provide a flexible approach to credit investing, is one example of an interval fund. Like all interval funds, it does not trade publicly.
There are three main reasons the bond firm chose the interval fund model:
- It offers a larger universe of opportunities and allows the managers to invest in its highest-conviction credit ideas such as private debt transactions.
- It gives investors a greater exposure to higher-yielding credit markets while avoiding the lower realized returns that can result from investor psychology, promoting longer-term investment periods. Investing in higher-yielding, less liquid assets presents a challenge in open-end mutual funds, which have daily liquidity.
- Investors can sell their shares back to the firm at net asset value (NAV) instead of at a discount or premium, unlike other closed-end funds.