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Date: August 1, 2017
Category: Alternative Investments

Interval Funds: Access to Institutional Investment Strategies [White Paper]

Interval funds institutional investments

In an investment environment fraught with obstacles, investors demand portfolios that go beyond the traditional to deliver true diversification, low volatility, and significant returns. Interval funds offer access to institutional alternative investment strategies that may help build better portfolios.

Invest differently

Economists have famously claimed that there is no such thing as a free lunch. However, the Financial Times notes that in the investment world, diversification comes close.1

Diversification involves building a portfolio of assets with different risk and return profiles. By investing in a range of non-correlated* assets, an investor can smooth volatility while generating higher potential income and total returns. Increasingly, however, traditional approaches to diversification are not working.

The main reason is the rising correlation between stocks and bonds.2 Traditional diversification strategies rely on a mix of stocks and bonds, with a small cash holding to serve as “dry powder” ready to be deployed should an investment opportunity arise. Historically, such a portfolio could consistently reduce correlation with broader markets. Today, however, the diversifying power of the traditional portfolio and its ability to deliver desirable investment returns are eroding.2

Investors understand this. A recent survey reports that two- thirds of investors do not believe a traditional portfolio is the best way to pursue returns and manage investments.3 Investors are eager for new ways to build portfolios that deliver on their long-term goals (Figure 1).
investor portfolio goals

Going beyond the traditional

Institutional alternative assets—such as private equity funds, hedge funds, and institutional real estate—seek to offer significant returns with lower volatility. Institutional investors know this and have historically generated market-beating returns by allocating, on average, 30 percent of their portfolios to these investments.4 However, individual investors are not so fortunate. Institutional alternatives are illiquid and carry high investment minimums and suitability standards that do not work for Main Street investors.

Interval funds offer a potential solution to this dilemma. Interval funds are closed-end, 40-Act funds that offer lower investment minimums and minimum suitability standards, as well as quarterly liquidity.** As alternative investment vehicles, interval funds are able to offer alternative assets within an accessible structure.

Click the button below to download the complete white paper.

* Correlation is a measure of the degree to which the value of different investment types move in the same direction; if they rise and fall independently of one another, they are non-correlated.

** Typically, no less than 5% of the shares outstanding will be made available for quarterly redemptions. Regardless of how an interval fund performs, there is no guarantee that shareholders will be able to sell all of the shares they desire in a quarterly repurchase offer.

1 Financial Times. There is no free lunch, but diversification offers a cheap one. 2/7/15.

2 Morgan Stanley. Breaking the Curse of Correlation. 6/24/16.

3 Natixis Global Asset Management. 2016 Global Survey of Individual Investors. 11/16.

4 Blackstone. Seeking an Alternative: Understanding and Allocating to Alternative Investments. 11/23/15.

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