For asset managers seeking to expand their investor base and access new investment opportunities, interval funds offer a compelling investment vehicle. Here, we explore the key considerations and benefits for asset managers looking to start an interval fund. By understanding the potential advantages and strategies involved, asset managers can effectively leverage interval funds to grow their business and provide investors with unique access to diversified investment options.
Understanding the Interval Fund Structure
Interval funds combine features from traditional mutual funds and closed-end funds, offering investors periodic liquidity options while also allowing investment in illiquid assets. This structure enables asset managers to create investment vehicles that provide greater flexibility and access to a broader range of strategies and asset classes.
Benefits for Investors
Interval funds offer several advantages for investors, which can be compelling selling points for asset managers. These benefits include:
- Liquidity Options: Interval funds provide investors with periodic liquidity opportunities, typically on a quarterly basis. This flexibility is attractive to investors who value the ability to buy or sell shares at regular intervals.
- Diversification: Interval funds enable investors to access various asset classes and investment strategies. By investing across various sectors and markets, interval funds provide built-in diversification, helping to manage risk and potentially enhance returns. While interval funds can provide access to an illiquidity premium, they can also be riskier than a traditional open-end mutual fund as they tend to invest in more illiquid assets.
- Access to Alternative Investments: Interval funds open doors to alternative investment strategies, such as private equity/credit, venture capital, or real estate. These strategies are typically limited to institutional or high-net-worth investors, but through interval funds, asset managers can offer shares to an unlimited number of non-accredited investors, allowing access to these potentially lucrative asset classes with lower required investment minimums.
Advantages for Asset Managers
Starting an interval fund can provide asset managers with several advantages that can contribute to the growth and success of their business. These advantages include:
- Expanded Investor Base: By offering an interval fund, asset managers can attract a broader range of investors who value the liquidity options and access to alternative investments that interval funds provide. This expanded investor base can lead to increased assets under management and potential growth opportunities.
- Greater Capital Stability: Interval funds offer asset managers a level of stability compared to traditional mutual funds. The defined redemption windows in interval funds help mitigate the pressure to sell assets during market volatility. This stability allows asset managers to execute their investment strategies with a longer-term perspective. The vehicle provides asset managers with the ability to limit redemptions to a maximum of 25% (and more typically set at 5%).
Considerations for Asset Managers
While interval funds offer significant benefits, asset managers should be aware of certain considerations when starting an interval fund:
- Regulatory Compliance: Interval funds are subject to regulatory requirements and oversight. Asset managers must ensure compliance with applicable laws and regulations, including registration, reporting and disclosure obligations.
- Fund Structure and Strategy: Asset managers need to carefully define the fund's investment strategy and structure to align with their target market and investor preferences. This includes determining the appropriate mix of asset classes, liquidity terms and redemption windows.
- Risk Management: Asset managers must have robust risk management processes in place to manage the unique risks associated with interval funds. This includes monitoring liquidity needs, assessing market and credit risks, and implementing risk mitigation strategies.
Starting an interval fund can be a strategic move for asset managers seeking to expand investor access to their strategies and ultimately increase AUM. By offering liquidity options, diversification benefits and access to alternative investments, interval funds provide a compelling investment vehicle for investors. Asset managers can leverage the advantages of interval funds to attract a broader investor base, enhance capital stability and potentially increase fee income.
As you consider the vehicle as an addition to your line-up, please reach out directly to discuss how SS&C can support your efforts with our suite of registered fund services including fund administration, transfer agency and statutory distribution. Download our "Navigating Interval Funds in Today’s Market" whitepaper to learn more.
Written by Vincent Rupp
Director, Business Development