Since 2007, assets under management growth for interval funds has grown about 276 percent, jumping from around $20 billion in the last quarter of 2007 to more than $75 billion at the end of 2023, according to Interval Fund Tracker.
A recent Morningstar report listed interval funds as one of nine assets that had gained the interest of investors and financial professionals alike but that many investors lacked knowledge about.
Alternative assets — and their benefits — are typically limited to institutional investors and the ultra-wealthy. However, only about half of advisors actually allocate to alternatives and those who do allocate only about 5 percent or less, according to Cerulli Associates, a wealth and asset management research and consulting firm.
“Over the course of 20 or 30 years, institutions had learned the importance of alternatives and portfolio construction and had incorporated that to create a more efficient portfolio, increasing returns and reducing standard deviation,” said Ramin Kamfar, founder and CEO of Bluerock, an alternative asset manager focused on real estate. “But individuals have lost their access to those portfolios because the defined benefit pension plan had gone away.”
Kamfar co-founded Bluerock in 2002 to bring institutional quality alternatives to individual investors. The firm now serves more than 85,000 RIAs and financial advisors. RIA Intel sat down with him to talk about the rise of interval funds and what advisors should know.
Responses have been edited for clarity and length.
What are interval funds?
In terms of the regulatory environment, they’re just a mutual fund. The difference is that while with mutual funds you can invest on a daily basis, and you can take money out on a daily basis, with interval funds, you invest on a daily basis but you have redemptions on a quarterly basis, and that provides some stability to the underlying capital and allows the interval fund then to invest in alternatives that are not necessarily daily liquid; they’re liquid over time. So you have daily pricing and transparency, you have no load or a very small load, you have liquidity on a quarterly basis, and the fees are institutional-level mutual fund fees. It’s an access vehicle that allows the individual investor to invest freely in less liquid alternative investments. It could be real estate, which is what we do. It could be private credit, it could be private equity, it could be secondaries, GP stakes, or anything else. An institution can go out and buy a building, but an individual can’t do that. They can’t write that size of check, they can’t professionally manage it, and they need liquidity on a regular basis.
Who can invest in an interval fund?
Anybody can invest in it. That’s the beauty of it. What we do is we write those $20 million or $50 million or $100 million checks, and we curate a portfolio of these underlying funds that own direct real estate, large industrial buildings, large apartment buildings, and then we put this wrapper around that, and we offer it to our underlying investors for a $2,500 or $5,000 minimum. So from a suitability and access point of view, it is the same as an open-end mutual fund. You can buy it with a ticker. It has a ticker, you can look up the pricing, and you buy it through your RIA.
If it has to be bought through an advisor, and it’s giving investors all of this access that historically went to institutions, why have so few advisors taken advantage of it?
Part of it is an access issue. The products are relatively new when compared to the history of how long mutual funds have been around. The other part of it is an education issue. The technology that showed that when you add alternatives to your stock and bond portfolio, it enhances your return at a lower risk, has been around for about 30 years, but it started out with institutions, and it took them decades to get educated and reallocate to alternatives. Individuals are 20 years behind them.
So, we are at the beginning of a very large reallocation. We’ve seen over the last couple of years that 60/40 has a lot of limitations; it doesn’t perform well in all circumstances. Whereas when you add alternatives to your portfolio, you get an extra 100 to 200 basis points of return annually, depending on what you add in and how much, without increasing your risk. That is huge. But that is also an education process to teach the hundreds of thousands of financial advisors about why this works, how it works, and how you use it in terms of portfolio construction. And that’s an ongoing process. It took institutions 20 years to reallocate, and it is going to take the retail community — FAs and RIAs — 20 years to reallocate. The institutional market is $18 trillion in the U.S. with a 30 percent allocation to alts, and the individual market is at $28 trillion in the U.S. with a 3 percent allocation. The onus is on us to educate the underlying advisors and to get them comfortable enough to educate their underlying clients and comfortable enough to allocate on their behalf.
What is causing the high growth in recent years?
Because it is a very elegant solution that delivers illiquid investments where the investor can’t buy directly because of size or access. The two biggest uses today for interval funds are on the real estate side and on the credit side. I expect growth to continue because that 3 percent allocation to alternatives is going to go to 5 percent, 10 percent, and 20 percent over time, but it’s not direct. People can’t all go out and buy big apartment buildings. So they have to access it either through a non-traded REIT — which has high fees, high loads, no transparency in terms of pricing, no liquidity — or through an interval fund.
Mutual funds as an asset class have been largely replaced by ETFs. How does that play into interval funds, since it’s a mutual fund wrapper?
That’s a very good question. The reason actively managed mutual funds are bleeding assets and shrinking rapidly is because managers are having trouble delivering alpha consistently. They can’t beat the market. So, the investor is saying, ‘Why am I paying a point to a mutual fund manager when I can put it into an ETF for 10 basis points or five basis points and just get market returns?’ The public stock and bond markets have gotten so efficient that it’s very hard for the top performers to distinguish themselves from the bottom performers, and that’s driving the growth of alternatives. In alternatives, the portfolio managers who are good are delivering significant alpha compared to the ones who aren’t good, and that’s why you can deliver above-market returns in an interval funds structure. And you can’t replicate that with an ETF because it’s not an index. If the underlying assets are hard assets, you can’t just go out and buy them in an ETF.
What are some of the drawbacks? Or who does this not make sense for?
It is an alternative at the end of the day, and alternatives tend to be less liquid. Interval funds are not an alternative to cash in the bank or a CD for someone who needs daily liquidity, but that’s pretty much it. Otherwise, it is a pretty elegant solution in terms of delivering alternatives efficiently at low cost, with liquidity on a quarterly basis.
