Topic: Beware of (but maybe use) Interval Funds
Speakers: Bob Huebscher (founder of Advisor Perspectives) and Joe Halpern (Managing Partner and CIO of Obsidian CIO) demystify an investment structure gaining popularity with both investors and advisors: Interval Funds.
This episode provides advisors with an essential framework for understanding both the opportunities and significant risks associated with interval funds, challenging the prevailing narrative that these vehicles offer simple, liquid access to sophisticated alternative strategies.
Unlike mutual funds and ETFs that are limited to 15% illiquid holdings, interval funds can hold 100% illiquid securities. The trade-off? While investors can enter daily, exits are limited to quarterly redemption windows with typical 5% gates on total fund assets.
Understanding this structure is critical for proper client positioning. Key discussion points include:
The underlying asset must align with the interval fund wrapper. Shorter-duration credit strategies work better than venture capital or private equity, where the forced cash drag undermines the strategy’s core economics.
If there’s any possibility a client might need access to these funds within 12-18 months, interval funds are inappropriate. These vehicles cannot be margined, and redemption queues during stress periods can be lengthy.
Interval funds are one tool among many for accessing alternatives. For qualified purchasers, traditional closed-end vintage funds may offer better performance by eliminating cash drag.
While the operational ease of interval funds—daily subscriptions, quarterly redemptions, ticker-based trading, 1099 reporting—makes them attractive to advisors, this simplicity can mask underlying complexity and risk.
Advisors may be allocating too much to interval funds, seduced by simplicity and the sophisticated alternative narrative.
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How to Scale Your RIA to $1 Billion AUM and Beyond
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IMPORTANT DISCLOSURE: Obsidian CIO LLC sponsors the podcast to further education and critical thinking about the factors that affect markets and investing, and the podcast does not provide investment advice. Investment advice is only offered to clients of Obsidian CIO who have entered into an advisory agreement and with whom Obsidian CIO has identified individual objectives, risk tolerance, and other investment needs.
