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Interval Fund: Structure, Pros, Cons, Tax Obligations

This page explains what an interval fund is, its pros and cons, legal tips, and how a lawyer from ContractsCounsel can help you with it.

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What is an Interval Fund?

An interval fund is an investment company that sometimes offers to buy back shares from its shareholders. This can be beneficial by offering more liquidity than what you’ll get with private equity funds, while offering investors access to illiquid assets. These include private equity and real estate.

Interval funds may be suitable for investors who want a steady stream of income, lower market volatility, and predictable redemption schedules. But there are important things to know about them before investing.

Read the rest of this article to learn more about interval funds and how they work.

How Do Interval Funds Work?

Here is the general way in which interval funds operate:

  • Investors invest in interval funds at any time during the year, which increases the fund’s flexibility and accessibility.
  • Interval funds are closed-end funds, meaning that a company combines money from shareholders to purchase investments or securities.
  • Redemptions occur during intervals that are scheduled ahead of time.
  • Units are redeemed at the Net Asset Value (NAV) during redemption periods.
  • Although there is limited liquidity, investors can make use of periodic exits.

What are the Pros and Cons of Interval Funds?

There are various advantages and disadvantages of interval funds.

Pros

  • Lower investment obstacles. With low minimum investment requirements, various types of investors can invest.
  • Controlled liquidity. Since investors can redeem their shares at certain intervals, fund managers hold less liquid assets. This gives them the flexibility to accommodate what investors require.
  • High potential for returns. Investing in illiquid assets has the potential to give investors the chance to reap higher yields as compared to traditional mutual funds.

Cons

  • High fees. Interval funds tend to have higher fees compared to traditional funds, and the reason for this is to cover costs such as sales charges and management expenses.
  • Complex strategies. Interval funds can invest in assets that are complex with high risk profiles. This can make them challenging for first-time investors.
  • Market risks. Assets involved in interval funds can be unpredictable, which can affect how well the strategy performs. Illiquid assets can be challenging to sell.

How Does Repurchase Work?

An interval fund includes repurchase offers that are provided to investors at scheduled times. When shareholders are notified of repurchase offers, they have a few weeks in which to respond.

When investors accept the repurchase offer, they have one week in which to wait to receive proceeds that are owing.

Shareholders will receive the price according to the per share NAV, and there could be a redemption fee included that covers any costs related to the repurchase.

However, repurchase offers are capped (usually 5 percent per quarter but sometimes up to 25 percent annually). If you exceed this limit, you might only be able to sell a portion of your shares.

What are Interval Fund Tax Reporting Obligations?

Form 1099 is required when completing your tax return. However, the fund’s investment distribution and strategy will influence how income and capital gains are taxed, so it’s worth consulting with a tax practitioner to help you if you’re unsure.

Form 1099 includes tax documents that enable you to report income paid to you by an individual or company that isn’t your employer. This informs the IRS of your other streams of income.

However, there are different 1099 forms. The most common found in interval funds are:

  • Form 1099-DIV. If the interval fund has paid you ordinary or qualified dividends and capital gain distributions, you’ll fill out this form.
  • Form 1099-B. If you sold shares, you’ll have to fill out this form to report sale proceeds, cost basis if reported by the broker, or capital gains or losses.

What’s the Difference Between Interval Funds and Traditional Closed-End Funds?

Traditional closed-ends funds are issued through one-time initial public offerings (IPOs). Interval funds, on the other hand, are offered continuously and don’t trade on exchanges.

Traditional closed-end funds trade at a discount or premium to their NAV, while interval funds are priced at the fund’s daily NAV.

Who Usually Invests in Interval Funds?

There are many investors who might want to invest money in interval funds. Some of the most common include the following:

  • Patient investors looking for long-term investments. This enables them to earn a stable income, depending on the strategy of the fund.
  • Retail and institutional investors. They don’t have to meet accreditation criteria.
  • Long-term investors who want to invest in securities.

Do You Need a Lawyer for Investing in Interval Funds?

You don’t always need to consult with a lawyer if you’re investing in interval funds.

For example, it might be unnecessary if you’re buying through a brokerage and you understand the ins and outs of the fund. However, you’ll need to be fully informed.

It’s worth consulting with a lawyer if you are investing in a large amount of money or one of the following applies to you:

  • You’re investing through an entity, such as a trust or LLC.
  • You’re dealing with complex offering documents and would like a professional lawyer to review them.
  • You’re worried about liquidity risks that can cause you to struggle to exit when you want.

Here’s what a lawyer can do to help you with interval funds:

  • They’ll assist you with reviewing the offering documents.
  • They’ll explain all complex terms that could be challenging to understand.
  • They’ll evaluate the fund’s fee structures.
  • They’ll protect your interests and help you to minimize your risks.

Where can you find a lawyer for help with interval funds?

If you’ve decided to hire a lawyer to help you with interval funds, you might wonder where you can find a professional and reputable one. ContractsCounsel, an online legal marketplace that connects clients with lawyers vetted on the platform, makes it a simple process.

You can find lawyers based on your requirements and review lawyer profiles according to factors such as their credentials, experience, client ratings, and expertise. This will ensure you can find a lawyer who can assist you with all your interval fund questions and concerns.


ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.


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