When someone starts tracking a new investment vehicle, it’s usually because the category is catching on and no else is tracking it. That’s what spurred Jacob Mohs
to create the Interval Fund Tracker this
year. The Interval Fund space is still
relatively small, with only $17 billion in
assets under management as of the third
quarter of 2017, but Jacob was intrigued.
“It’s an interesting space that’s accelerating, and I saw a gap that other data
providers were not filling,” Jacob told
Don’t be surprised if you’ve never
heard of an interval fund or its “sibling,”
the tender-offer fund. They both belong
to the family of so-called unlisted closed-end funds, and while they’ve been around
since 1993, unlisted closed-end funds have
not made much of a splash until recently.
Their growing popularity can be
traced to the never-ending search for
higher and uncorrelated returns. But it
can also be tied to tapping the so-called
“mass affluent” retail market and argu-ably, to academic work by the behavioral
economist and recent Nobel Laureate
Richard Thaler who argues that we
aren’t rational consumers, after all.
In 1992, the SEC published a landmark study recommending the industry
to “chart new territory between the two
extremes of the open-end and closed-end forms of investment funds.” In other
words, explore the possibilities that lie
between highly liquid mutual funds and
illiquid closed-end funds.
Interval and tender-offer funds were
created to meet that challenge. Unlike
traditional closed-end funds, interval
and tender-offer funds do not currently
trade on the secondary market. Instead,
interval funds offer to repurchase 5-25%
of its shares at their net asset value at
intervals — it could be every three, six or
12 months. Tender-offer funds also offer
to repurchase shares, but at times set by
the fund’s trustees.
This “not too hot, not too cold” liquidity feature was designed to appeal to
investors who aren’t super wealthy and
want access to potentially higher returns
that illiquid investments can deliver
without the long lock-ups, capital calls,
K- 1 tax forms or the high minimums
typically required by alternative investments. About two-thirds of interval funds
have an investment minimum of $10,000
or less, while about half of tender-offer
funds have $50,000 or lower minimums,
according to an industry report.
What strategies do interval and ten-
der offer funds pursue? They fill their
portfolios with the both predictable and
the innovative. Some specialize in private
equity, others in marketplace lending,
where consumers and businesses connect
with investors who want to buy or invest
in loans. Other funds buy catastrophe
bonds tied to insurance companies, real
estate, credit and long/short equity. Or
you can invest in multi-asset funds that
combine strategies under one umbrella.
Obviously, limited liquidity helps
managers who are trying to implement
these strategies. Portfolio managers can
invest without fear of investors rushing
to the exits if markets head south. At the
other end of the spectrum, these funds
may be doing investors a favor by being
less liquid than open-end funds.
Being able to convert any asset into cash
immediately and easily sounds like a perfect world for investors, but studies show
that’s not the case. Individual investors are
often their own worst enemy, according to
Dalbar, the Boston-based firm that evaluates the financial services industry.
“No matter what the state of the mutual fund industry, boom or bust, investment results are more dependent on
investor behavior than on fund performance,” Dalbar states in its 2017 report.
“Mutual fund investors who hold on to
their investments are more successful
than those who try to time the market.”
Those findings probably would not
surprise behavioral economists like
Thaler. The relative illiquidity of interval and tender-offer funds could potentially benefit investors two ways — by
providing access to the illiquidity premium that may be reflected in higher-yielding securities, while protecting
against a rush for the exits at precisely
the wrong time.
Matt Osborne is co-founder and chief
investment officer of Altegris.
By Matt Osborne
New Kids on the Block
A look at the strategies of interval and tender offer funds and what’s inside
Nothing herein should be construed as investment or tax advice, nor is it a recommendation to buy or sell any securities.