Beware of Interval Funds

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arcticpineapplecorp.
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Beware of Interval Funds

Post by arcticpineapplecorp. » Sat Dec 10, 2016 9:34 am

Never heard of these things but thought I'd share this with others so they avoid them. Entire article below:

https://www.realinvestingjournal.com/re ... -intervals

Interval funds allow managers to invest in illiquid assets, like commercial real estate, farms, and oil interests, relatively safe in the knowledge that investors can’t suddenly yank out all of their money forcing the fund to liquidate those assets as “fire-sale’ prices.

The “interval” feature of these funds restricts withdrawals to four times a year when the manager must earmark a small percentage of the funds for liquidation requests. Once that money is gone, fund withdrawals stop until the next quarterly window opens. So, getting all of your money out quickly is almost impossible (particularly in times of panic).

Also, because interval funds invest in assets for which there is no active secondary market, knowing the actual value of your portfolio at any given time can be nearly impossible. You can’t tell if they are managing well or poorly, even over extended periods of time.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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whodidntante
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Re: Beware of Interval Funds

Post by whodidntante » Sat Dec 10, 2016 9:38 am

I think eREITs are similar. If you are two minutes late requesting your withdrawal you have to scrounge for another quarter.

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Re: Beware of Interval Funds

Post by larryswedroe » Sat Dec 10, 2016 10:27 am

There is NOTHING wrong generically with interval funds. Some are good and some bad. But the important point to know is that you are investing in an illiquid asset and thus should be earning a liquidity premium, which if you have the ability to take liquidity risk as don't have need for that amount of cash, then it's perfectly reasonable to seek that premium.

I personally have about 10% of my assets in interval funds and they are in my IRA accounts where I have no need for liquidity---Remember you don't hit 20% (annual minimum you can get out) for your RMD until about 90.

If don't need liquidity than liquidity premium is basically a free lunch for you as you can take risks others cannot.
Larry

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arcticpineapplecorp.
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Re: Beware of Interval Funds

Post by arcticpineapplecorp. » Sat Dec 10, 2016 12:16 pm

larryswedroe wrote:There is NOTHING wrong generically with interval funds. Some are good and some bad. But the important point to know is that you are investing in an illiquid asset and thus should be earning a liquidity premium, which if you have the ability to take liquidity risk as don't have need for that amount of cash, then it's perfectly reasonable to seek that premium.

I personally have about 10% of my assets in interval funds and they are in my IRA accounts where I have no need for liquidity---Remember you don't hit 20% (annual minimum you can get out) for your RMD until about 90.

If don't need liquidity than liquidity premium is basically a free lunch for you as you can take risks others cannot.
Larry

Thanks Larry. That makes sense, but what do you say about Don's last piece I quoted above...that you don't know how to value the investments and don't know how "good" those active managers really are (compared to a value benchmark I presume)?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Beware of Interval Funds

Post by larryswedroe » Sat Dec 10, 2016 1:54 pm

Re valuing them.
Again it DEPENDS on the fund.

Some buy instruments that are difficult to value, and have to wonder who is actually setting the valuations. I would stay away from those.

On the other hand the Funds I invest in LENDX and SRRIX have Ernst and Young as the auditors and Duff and Phelps (in the case of LENDX) and a leading insurance modeling and valuation company (RMS) doing the daily valuations.

Larry

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Re: Beware of Interval Funds

Post by Ping Pong » Sat Dec 10, 2016 2:44 pm

I'd be wary of purported liquidity premiums. If there were a decent premium, a liquid entity could issue liquid shares and then buy illiquid assets, thereby arbitraging the premium and creating liquidity. If farmland had a liquidity premium, it'd be easy enough to buy a bunch of farmland, rent It out, and create a tradeable REIT.

Commercial real estate is very illiquid but they've created REITs which make it very liquid.

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Re: Beware of Interval Funds

Post by larryswedroe » Sat Dec 10, 2016 3:32 pm

ping pong
That isn't true

Example, you want to be in the reinsurance business and you buy three years worth of quota shares--that's typical arrangement. Obviously you must have capital committed for three years and there is no liquid market for these investments.

Similarly with consumer and small business loans that are fully amortizing term loans, though here there is a market that SOMETIMES is liquid. In fact, LENDX has sold some assets to book profits and reinvest the capital

Sometimes there's no liquid vehicle. But one should be very careful in this space, making sure that assets are marked properly/independently and there is good auditing.
Larry

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Re: Beware of Interval Funds

Post by rrppve » Sat Dec 10, 2016 6:31 pm

I think the highly limited liquidity of interval funds is a real problem. You have very limited liquidity exactly when you want it, which will be when everyone also wants out. Also, I think these are perpetual and don't have a fixed distribution date when you know you'll be able to get the value of your account back. So how do you exit the investmen?

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Re: Beware of Interval Funds

Post by nisiprius » Sat Dec 10, 2016 6:47 pm

"Wall Street is now taking a greater interest in a little-known type of mutual fund, that has existed for many years, called an "interval" fund...." I wondered if these could actually be mutual funds, but I guess they are.
An interval fund is a type of investment company...

Legally, interval funds are classified as closed-end funds, but they are very different from traditional closed-end funds in that:

Their shares typically do not trade on the secondary market. Instead, their shares are subject to periodic repurchase offers by the fund at a price based on net asset value.

They are permitted to (and many interval funds do) continuously offer their shares at a priced based on the fund’s net asset value.

An interval fund will make periodic repurchase offers to its shareholders, generally every three, six, or twelve months, as disclosed in the fund’s prospectus and annual report...

Interval funds are regulated primarily under the Investment Company Act of 1940 and the rules adopted under that Act, in particular Rule 23c-3. Interval funds are also subject to the Securities Act of 1933 and the Securities Exchange Act of 1934.
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Re: Beware of Interval Funds

Post by Trader/Investor » Wed Sep 13, 2017 10:56 am

A board favorite here SRRIX the Stone Ridge Reinsurance Risk Premium Interval Fund lost 11% last week marked down due to the hurricane. It has since bounced back a bit but still negative over 5% for the year. I am not a fan of interval funds but can see how it's illiquidity prevented many investors from rushing for the exits. It will be interesting to see how it handles any redemptions at its next interval. And who knows, maybe last week was an overreaction and now is an opportune time to buy for those so inclined.

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nedsaid
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Re: Beware of Interval Funds

Post by nedsaid » Wed Sep 13, 2017 12:06 pm

Trader/Investor wrote:
Wed Sep 13, 2017 10:56 am
A board favorite here SRRIX the Stone Ridge Reinsurance Risk Premium Interval Fund lost 11% last week marked down due to the hurricane. It has since bounced back a bit but still negative over 5% for the year. I am not a fan of interval funds but can see how it's illiquidity prevented many investors from rushing for the exits. It will be interesting to see how it handles any redemptions at its next interval. And who knows, maybe last week was an overreaction and now is an opportune time to buy for those so inclined.
This is a tough discussion, there was an infamous thread on this and related topics that caused a well known contributor to exit the forum. I am in the camp that investors should seek liquidity, it seems that illiquid products or semi-liquid products are fraught with potential problems. For one thing, it greatly complicates the process of leaving an advisor.

If you were to buy such products, you need both a longer term perspective and a philosophical alignment with your advisory firm. One would also have plenty of liquidity elsewhere. You also need a strong belief in these products.

In the case of Stone Ridge products, I would say maybe. There is a lot of merit to reinsurance as an investment. With these type of investments, there tends to be a "late to the party" issue. Pretty much, retail investors tend not to get the best deals with these alternative investments. David Swenson at Yale had great success with alternatives but most who tried to copy him (other endowments) did not enjoy his results. I recall reading that these endowments would have been better off in a plain vanilla 60/40 balanced fund.
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