The mutual fund made a promise that defined it: bring your shares back any day and we will give you their value in cash. That promise is why mutual funds became the default retail investment vehicle, and it is also why they cannot hold much that is hard to sell. A fund obliged to pay out daily cannot own a portfolio of private loans.
The interval fund breaks the promise deliberately, and gets something in return.
The bargain
An interval fund is a registered closed-end fund that adopts a fundamental policy under Rule 23c-3 of the Investment Company Act, committing to make periodic repurchase offers for a stated percentage of its outstanding shares at NAV, at stated intervals.
Two words carry the structure. Periodic — not daily. Percentage — not unlimited.
Because the fund only has to stand ready at intervals, and only for part of its shares, it can hold assets a daily-redeeming fund cannot: private credit, real estate, private equity secondaries, litigation finance, and other strategies whose whole return proposition depends on not needing to sell quickly.
That is the bargain in one sentence: the investor gives up daily liquidity, and receives access to strategies that daily liquidity would exclude.
Whether that is a good trade depends entirely on whether the strategy genuinely earns something for its illiquidity, and on whether the investor genuinely does not need the money.
How the repurchase mechanism works
Rule 23c-3 sets the framework, and each fund adopts its own policy within it.
The interval. Most interval funds repurchase quarterly. Some use other intervals permitted by the rule.
The amount. The fund states the percentage of outstanding shares it will offer to repurchase, subject to the rule minimum. Many funds offer more than the minimum in ordinary conditions.
The process. The fund gives notice of the repurchase offer, shareholders submit requests during the window, and the fund repurchases at NAV determined on a specified date. A modest repurchase fee may apply.
Proration. If requests exceed the offer amount, the fund repurchases pro rata. Every requesting shareholder receives part of what they asked for, and the balance is not carried forward — a shareholder wanting out must request again at the next interval.
Liquidity backing. The rule requires the fund to maintain liquid assets sufficient to meet the repurchase offer from the notification date, which is the mechanism ensuring the commitment is credible.
The committed schedule is the defining feature, and it distinguishes interval funds from tender offer funds, where repurchases are at the board discretion rather than obligatory.
Where proration actually bites
The mechanism is straightforward. Its behaviour under stress deserves emphasis, because it is where investor expectations most often diverge from reality.
In ordinary conditions, repurchase requests typically fall well below the offer amount, everyone who asks gets out in full, and the structure feels like a slightly slower mutual fund.
In stressed conditions — which is when investors want out — requests can exceed the offer, and proration binds. An investor requesting full redemption may receive a fraction, then queue again next quarter, and possibly be prorated again.
This is not a malfunction. It is the structure operating exactly as designed and disclosed, and it is the direct consequence of holding illiquid assets. But an investor who understood quarterly repurchases as quarterly liquidity has misunderstood the product. The correct mental model is: a periodic, capped, prorated opportunity to exit, most likely to be constrained precisely when exit is most wanted.
The mechanics are covered further in interval fund liquidity mechanics, and the general concept in gate provisions.
Why the wrapper spread so widely
Interval funds became a common package for alternative strategies for reasons that are mostly about access rather than investment merit.
Broad eligibility. Interval funds are registered and generally available without accredited investor requirements, at relatively low minimums. An investor who cannot access a private credit partnership can typically access an interval fund pursuing a similar strategy.
1099 reporting. Most elect regulated investment company treatment, so shareholders receive 1099s rather than K-1s.
No capital calls. Money is invested at subscription into an existing portfolio. There is no unfunded commitment to manage and no J-curve.
Registered-product disclosure. Prospectus, annual and semi-annual reports, and an independent board.
Distribution reach. The wrapper fits existing advisory platforms and custodial systems in a way private partnerships do not.
What to examine
The actual repurchase history. Not the stated policy — what happened. Have offers been prorated, and when? This is disclosed in fund reports and is the single most informative item about the fund liquidity in practice.
Portfolio liquidity composition. How much of the portfolio is genuinely illiquid, and what the fund holds to fund repurchases. A fund holding a large liquid sleeve is safer on liquidity and is also earning less illiquidity premium on that sleeve — a trade-off worth seeing rather than assuming away.
Fees. Interval funds generally carry higher expense ratios than comparable mutual funds, reflecting the underlying strategies. Some also have share classes with distribution costs. The relevant test is whether the strategy net of its fees still beats a liquid alternative.
Valuation. Illiquid holdings are fair valued. Who values them, how often, and with what independent input.
Distribution composition. How much of the distribution rate is supported by income rather than return of capital.
Leverage, where used, and its terms.
Flows. Rapid asset growth pressures a manager to deploy into whatever is available; sustained outflows force sales. Both affect the portfolio.
Where interval funds sit
Against mutual funds: more access to illiquid strategies, less liquidity, higher fees.
Against BDCs: overlapping in practice. BDCs are constrained to eligible portfolio companies and disclose position-level schedules; interval funds have broader latitude in what they hold but generally less granular public disclosure. A credit strategy can be delivered in either.
Against private partnerships: dramatically broader access and simpler tax, in exchange for the constraints of a registered vehicle and, usually, higher headline fees.
Against tender offer funds: a committed repurchase schedule rather than a discretionary one.
For an independent, unaffiliated list of sponsors active in the space, see the SQX Alts directory.
The cluster
- Evergreen funds — the broader perpetual category
- Tender offer funds — discretionary repurchases
- Interval fund liquidity mechanics — how repurchases actually run
This guide is educational and general; it is not investment, tax, or legal advice. Fund policies differ materially; review the prospectus for any specific fund.
Frequently Asked Questions
What is an interval fund?
A registered closed-end fund that makes periodic repurchase offers for a set percentage of its outstanding shares at net asset value, at stated intervals, under Rule 23c-3 of the Investment Company Act. The committed schedule is what distinguishes it: repurchase offers are an obligation rather than a discretionary decision.
How often can you sell an interval fund?
At the intervals specified in the fund policy, which for most interval funds is quarterly. The fund must offer to repurchase a stated percentage of outstanding shares at each interval. If shareholders request more than the offered amount, requests are prorated.
Are interval funds only for accredited investors?
Generally no. Interval funds are registered under the Securities Act and the Investment Company Act and are typically available without accredited investor requirements, with relatively low minimums. This broad accessibility is a large part of why they became a common wrapper for alternative strategies.
How are interval funds different from mutual funds?
A mutual fund redeems shares daily and is therefore constrained in how much illiquid assets it may hold. An interval fund repurchases only at stated intervals and in limited amounts, which allows it to hold substantially more illiquid assets. The trade is straightforward: less liquidity for the investor in exchange for access to less liquid strategies.
What are the drawbacks of interval funds?
Liquidity is limited and can be prorated in stressed conditions, fees are generally higher than comparable mutual funds, valuation of illiquid holdings involves judgment, and there is no secondary market so the repurchase offer is effectively the only exit.
Sources
- Investment Company Act of 1940, Rule 23c-3 (periodic repurchases by closed-end companies)
- Investment Company Act of 1940, Rule 22e-4 (liquidity risk management for open-end funds)
- Internal Revenue Code Subchapter M (regulated investment companies)
