◼ FINANCE Bloomberg Businessweek June 24, 201935ILLUSTRATION
BY
SAM
ISLAND
Thehottestthingininvestingforthepastdecade
hasbeenlow-costexchange-tradedfunds,which
investorscanhopinandoutofanytimethemarket
is open.Sohere’sa strangeproposition:Howabout
buyinga fundwithhigherfeesandrestrictionson
whenyoucantakeoutyourmoney?
Somebigassetmanagersthinkinvestorsareready
totakethatoffer.PacificInvestmentManagement
Co.,BlackstoneGroup,AresManagement,and
evenBlackRock—theETFgiant—haveallintroduced
“intervalfunds”inthepasttwoyears.Intervalfunds
restricttotalwithdrawalstoa rangeof5%to25%
offundassetsina specifiedperiod,suchasonce
a quarter.JamesSeyffart,a BloombergIntelligence
analyst,likensthemtotheHotelCalifornia,witha
twist:“Youcanonlysometimesleave.”
What’sinit forinvestors?Fundcompaniessay
intervalfundshavea chancetodeliverhigher
returnsbycapturingwhat’sknownastheilliquidity
premium. Because they don’t have to be able to
redeem shares on a moment’s notice, interval
funds can build their portfolios on thinly traded
commercial mortgages, loans, private equity debt,
and other high-yielding, high-risk assets usually
available only to wealthy individuals and institu-
tional investors. Conventional mutual funds can
also buy some of the assets interval funds hold, but
they have limits on how far they can go. “Our goal
has been to democratize access to alternative strat-
egies,” Eric Mogelof, Pimco’s head of wealth man-
agement, says about interval funds.
That access doesn’t come cheap. For example,
the Pimco Flexible Credit Income interval fund has
an expense ratio of more than 3% of assets per year,oraboutthreetofourtimesasmuchasthefirm’s
mostpopularbondmutualfund,PimcoIncome,
dependingontheshareclass.Intervalfunds’costs
aresteeperbecauseit’sexpensivetopickandtrade
theassetstheybuy,accordingtoMogelof.
Therewere 56 intervalfundswitha totalof
$25billioninassetsasofMay31—that’stwiceas
manyfundsandtwiceasmanydollarsasthere
wereinthecategorytwoyearsago.Investorshave
beendrawntothefundsinpartbecauselowinter-
estrateshavedraggeddownreturnsonmore
conventionalinvestments.PimcoFlexibleCredit
Income,whoseportfolioincludesmortgage-backed
securities,Italianbankdebt,distressedutilitydebt,
andconsumerandstudentloans,hasearnedan
annualized8.4%sinceitslaunchinFebruary2017.
Thatcompareswith5.4%fortheliquidPimco
Incomefundoverthesameperiod.
OtherintervalfundsincludeonefromPimco
thatspecializesinjunk-grademunicipalbonds
anda newBlackRockfundthatinvestsincorporate
debt.Intervalfundsaresoldmainlythroughinter-
mediariessuchasadvisers.“Retailinvestorswith-
outfinancialadvisersthatarepoint-and-clickingto
buymaynotunderstandwhatthey’regetting,”says
EvanStoff,a seniorresearchanalystwithVivaldi
AssetManagementinChicago,whichusesinterval
funds.Hesaysthefunds’mainvalueis toadddiver-
sificationtoa broaderportfolio.
Whilerestrictingredemptionscanreducevol-
atility,intervalfundscanstilllosemoney.The
largestis the$4.8billionStoneRidgeReinsurance
RiskPremiumIntervalFund,whichinvestsin
insurance-relatedassets.It lostalmost9%inthe
fourthquarteroflastyearafterinsurerswere
forcedtocoverdamagesfromCalifornia’swild-
fires,accordingtoIntervalFundTracker,a website
thatfollowsthefunds.StoneRidgePresidentRoss
Stevensdidn’trespondtorequestsforcomment.
Someoftheassetsintervalfundstendtobuy
maybegettingriskier.Oneexampleis leveraged
loans—orloanstobusinesseswithless-than-stellar
credit.They’veexpandedinrecentyearstoa
$1.2trillion market, and terms on the loans have
gotten looser as yield-hungry investors have poured
in. Federal Reserve Chairman Jerome Powell
recently said he doesn’t think these loans pose a● Totalassetsin interval
fundsasofMay 31$25b
Funds That Lock Up Your
Money—On Purpose
● Interval funds make withdrawals harder
so they can make wilder investments