Illiquid Intervals

When University of Chicago professor Eugene Fama says that Wall Street comes out with something like a new product per week, he’s not too far off. Most of the latest artfully designed investment products are not intended to help you as much as they are designed to help the sellers.

In the past, I have warned against using esoteric and opaque products like “liquid-alt” mutual funds (costly hedge funds for the masses) and expensive, illiquid, non-publicly traded real estate investment trusts (REITs).

Those products are now yesterday’s news. While still a tiny portion of the investment industry, 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.

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.

Don McDonaldComment