Interval fund performance during the global financial crisis (GFC) of 2008-2009 provides a useful case study for understanding how Covid-19 might impact the sector. Although the global pandemic and economic shutdown we are currently experiencing is unique, every financial crisis has certain characteristics in common.
How a Financial Crisis Impacts Interval Funds
First the bad news. Tender offers were oversubscribed during the GFC, and the interval fund sector shrank significantly. Fortunately, the limited redemption requirements helped fund managers avoid firesales of assets. There were large mark to market writedowns in 2008, and most funds reported losses. On the other hand, most funds recovered rapidly after the crisis. The heightened uncertainty created opportunities for managers with capital to put to work.
Interval Fund Strategies: Then and Now
Prior to the GFC, the interval fund sector was smaller, and more focused on equity strategies than it is today. In recent years, asset managers have mainly used interval funds to implement alternative strategies not normally available to retail investors. Real estate was not a common interval fund strategy until recently, when non-traded REIT sponsors started entering the space. Additionally, prior to the GFC there were no interval funds focused on derivatives and insurance linked securities. Credit is the only interval fund strategy that has been consistently popular for over a decade.
The following chart shows a comparison of the interval fund sector by investment strategy in 2008 and 2020.
Interval Funds During the Financial Crisis
During the 2008-2009 financial crisis, the interval fund sector shrunk along with the rest of the asset management industry. At the beginning of 2008, there were 30 active interval funds with a combined total of $20 billion in net assets. By the end of 2010, the sector had shrunk down to 14 funds with less than $7 billion in total net assets. Although the sector shrank, funds that stuck around rebounded quickly. Investors who held on to interval fund investments through the subsequent recovery typically had positive returns.
This post is a preview of a full report only available for Premium Members. Details in the full report include:
- Total returns earned by credit, equity, and other interval fund strategies during the financial crisis.
- Details on fund mergers and liquidations during market turmoil.
- Information on the four interval funds still active today that operated through the 2008-2009 GFC.
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