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Date: January 8, 2018
Category: Alternative Investments

The Right Questions to Ask Your Interval Fund Manager

Interval funds are a rapidly growing investment vehicle in the alternative sector. They may help you diversify your portfolio, while still offering you a level of liquidity. As with any new and exciting investment, there’s a lot to take into consideration.

Not all of these funds are created equal, and it’s important for you to ask the right questions to figure out which interval fund is right for you.

Asking the tough questions

First, odds are you are looking for income. What is the fund’s yield? Income is a core objective of many interval funds, but not all funds deliver. Compare the yield of similar funds in order to make a sound, objective decision.

Second, what percentage of the fund’s portfolio is liquid? Interval funds offer you potential liquidity through quarterly redemptions, but what happens if a fund runs short on cash and defaults on its redemption requirements? Typically, portfolios that hold illiquid, private equity assets, have a harder time accessing cash. A portfolio that includes an allocation to publicly-traded assets can better support liquidity.

Next, what’s the fund’s interest rate exposure? Interest rates are on the rise and not all assets will react the same. Floating-rate bonds, apartments, and mortgage REITs have the potential to hedge against a rising interest rate environment, while fixed-rate bonds and stocks are more vulnerable.1,2 When picking an interval fund, you’ll want to look for one that has assets with the potential to mitigate interest rate risk – especially now.

Does price matter? Of course it does! Private equity assets are priced using complex valuation models that are not always transparent. To help you manage risk, you’ll want a fund that includes publicly-traded assets that are priced transparently by markets, and can be sold for a known price.

Finally, have you ever considered who might end up managing your portfolio? Interval funds may carry a particular manager’s name but that doesn’t mean that they’re actually managing the fund. They may in fact be outsourcing to sub-advisors, and this can reduce accountability. Sub-advisors may have the ability to make investment decisions without the approval of the manager, not to mention they add an additional layer of fees. Funds with in-house management on the other hand, are focused exclusively on managing the fund and can be held accountable for all decisions made.

Are you ready to invest?

Today’s investment environment can be challenging and unpredictable. Interval funds are a potential solution but it’s important to do your due diligence. Compare all of your options in order to make sure that you choose the best one to meet your investment goals.

1 MarketWatch. Your Bond Funds Will Do This When Interest Rates Rise. 4/10/15.

2 MarketWatch. How a Fed Interest-rate Rise Could Lead to a Stock-market Top – in 2017. 5/23/16.
 
This information is educational in nature and does not constitute a financial promotion, investment advice, or an inducement or incitement to participate in any product, offering or investment. It is not intended to be used as a tool to determine your specific financial situation, tax status, investment objectives, investment experience, suitability for any specific investment, risk tolerance or investment profile. Resource is not adopting, making a recommendation for or endorsing any investment strategy or particular security.

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