Investing in Interval Funds

Investing in Interval Funds

Oftentimes, investors are so focused on stocks and bonds that they forget about the many other methods of alternative investments. The appeal of stocks is obvious. Simple buying and selling of stock in companies that we use every day, we get a little piece of the pie.

However, there is a vast array of investment strategies and tools out there at our disposal, perhaps many that some investors will never even know about. From different managers to different assets, these investments can be very advantageous to your financial future if you are just aware of what you’re looking for.

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Interval funds [^1] are a great example. They’re an investment vehicle that many investors have probably never even heard of, let alone considered adding to their portfolio. Yet, this can be a great alternative to the traditional means of investing. Let’s explore these funds to see how they might fit into your plans for the future.

What Are Interval Funds?

Now that we have introduced a new investment concept to many of you, it is probably a good idea to take a minute and explain what exactly an “interval fund” is.

An interval fund is an example of a closed-end fund [^2], a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital. Instead of trading on the secondary market, an interval fund periodically offers to buy back a percentage of outstanding shares at net asset value (NAV).

Again, these aren’t your typical investments, but they warrant investors’ attention nonetheless [^3]. The rules that come along with investing in an interval fund, as well as the asset they typically invest in, aren’t of the run-of-the-mill variety. These rules and asset classes make investment in an interval fund very illiquid, meaning the buying and selling of your position is not possible as in investing in stocks.

So what types of assets do these funds typically hold? These funds have the ability to invest in alternative types of assets, referred to above, that many investors don’t know about or don’t have interest in. These investments include commercial real estate, consumer loans, debt, and other illiquid assets, and also helps increase interval fund yields.

Which brings us to the “interval” part of the investment. Interval refers to the periodic events in which the fund purchases back its own shares [^4]. That is, the fund periodically offers to buy back a stated portion of its shares from shareholders. However, shareholders are not required to accept these offers and sell their shares back to the fund.

Why Invest In Interval Funds?

You may be asking yourself why someone would want to invest in an interval fund? Well, if you’re like most investors, you’re after the higher returns that often accompany these investments.

Because they are invested in these illiquid, alternative investments, the fund’s performance isn’t necessarily tied to a falling stock market. Investing in things like debt and real estate presents investors with an investment strategy that can see higher yields as well as operate independent of other economic conditions.

In essence, it is another way for investors to diversify their holdings, and therefore, spread out their risk, instead of being tethered tightly to the stock market. Especially, when the market is dragging you down to its depths.

Historically, real estate does well during times of higher consumer prices over the long term [^5]. As prices of assets rise, so do property values, which also tend to have stickier prices. Moreover, consumer and corporate debt continues to increase. As it does, it's a good idea to be on the receiving end of any interest income that could be generated.

However, there are some other pros outside of just chasing the higher returns. Not only are these investments often less volatile and market reactive (since investments are not tied to equities), they also grant retail investors access to institutional-grade alternative investments with relatively low minimums.

You may be looking at the fact that these investments being illiquid as a bad thing; however, when you consider this deters normal investor “buy high/sell low” behavior, you begin to think about this as a positive. This also reinforces the stability of the asset value. If your goal is to invest for the long term, the idea of your money being locked up in a high-yielding investment doesn’t make you sweat all that much.

How To Invest?

Like all investments, whether traditional or alternative, Magnifi makes it easy to explore and even get started investing in a range of funds, especially interval funds.

Simply searching the term “interval fund” will provide you with a variety of options, like those with real estate focused strategies. However, you also have the option of targeting those funds that deal with corporate lending. Both provide the promise of stability, as well as great long-term investments.

References:

1. “Interval Fund”, May 21, 2022, Investopedia.com, https://www.investopedia.com/terms/i/intervalscheme.asp
2. “Closed-end Funds”, Investor.gov, https://www.investor.gov/introduction-investing/investing-basics/glossary/closed-end-funds
3. “Interval Funds are a Fast-Growing Alternative Investment Vehicle”, April 25, 2022, CAIA.org, https://caia.org/blog/2022/04/25/interval-funds-are-fast-growing-alternative-investment-vehicle
4. “Interval Fund”, Investor.gov, https://www.investor.gov/introduction-investing/investing-basics/glossary/interval-fund
5. “With inflation running hot, real estate is a refuge”, October 23, 2022, Mynd.co, https://www.mynd.co/knowledge-center/what-happens-to-real-estate-during-inflation

Disclosures:

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The information and data are as of May 12, 2023 unless otherwise noted and subject to change. This blog is sponsored by Magnifi.

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