We often receive questions from financial advisors about interval fund liquidity. Perhaps you’ve found a fund with a top notch sponsor, and a strategy that fits perfectly in your client’s portfolio, but have concerns about how easy it is to exit. Understanding the nuances of interval fund liquidity will help you make use of this dynamic and versatile product structure. 

Mutual funds offer daily liquidity, and can generally be suitable for just about everyone. Private equity funds typically have long lockups, and are only suitable for investors with a higher net worth. Non-traded REITs, BDCs and tender  offer funds often have a habit of making quarterly repurchase offers for 5% of the outstanding shares, but the board can(and frequently will) cancel a share repurchase plan without shareholder consent for any reason. Interval funds by definition must offer to repurchase a minimum of 5% of shares from investors at NAV at consistent intervals(typically quarterly). An interval fund repurchase plan can generally only be changed if shareholders approve the change. This is known as the “interval fund rule” . An interval fund manager can only suspend redemptions in very limited and extreme circumstances, such as if there is a shutdown in capital market activity making it impossible to calculate NAV(mutual funds can also suspend redemptions for similar reasons). In practice, if all investors in an interval fund rush to the exit at the same time, the manager will redeem them slowly over several quarters.

Portfolio positioning

Its important to remember that an interval fund will only offer to repurchase 5% of shares each quarter. That means in a crisis if a lot of investors want to exit at the same time, your clients will get their cash back over several quarters, and might have to wait a relatively long time to exit their entire position. In some cases this might actually be an advantage from an investor psychology standpoint, provided overall cash flow planning is done right. You should make sure your clients understand this subtlety and are properly positioned in their overall portfolio. In the middle of a bull market tender offers are way under-subscribed, but when the market gets volatile they may be oversubscribed for a few quarters in a row. Each fund will have its own unique circumstances, however.

You should still consider an interval fund to be an illiquid investment and position it accordingly. Yet the requirement that the manager makes regular tender offers makes them a better option for a lot of investors. 

The elegant compromise of interval fund liquidity

Interval fund liquidity represents an elegant compromise between two broad extremes of liquidity offered by available investment products. Daily liquidity offered by mutual funds really limits investment options and the ability to get alpha, but 5-10 year lockups common in private equity are not appropriate for many investors. Interval funds make it easier for advisors to offer the benefits of alternative investments to a wider variety of clients.