As alternatives grow in popularity among individual investors, hedge fund and alternative managers are increasingly pursuing retail sales through interval closed end funds (iCEF) created as a result of partnerships, according to experts.

Apollo partnered with American Beacon, for example, and the Carlyle Group with OppenheimerFunds to create new closed end funds.

“There is a lot more interest in the products coming to market in the interval fund space, which are a type of closed end mutual fund that is hardwired to remain open in a continuous offering so that shareholders have liquidity as well as a quarterly, annual or semiannual tender,” said Kimberly Flynn, CFA and managing director of alternative investments with XA Investments in Chicago.

That’s partly because institutional assets are shrinking.

Flynn was among a panel of speakers at the New York Stock Exchange last week that included George Lucaci, partner with Mercury Advisors in New York, Drinker Biddle & Reath Attorney Benjamin D. McCulloch and
Abigail Corcoran, a former financial advisor.

According to a report from McKinsey & Company, excluding defined contribution, U.S. institutional assets have suffered cumulative net flows of negative $278 billion over the past 5 years.

“Currently, the assets under management in iCEFs seem to be from family offices, high net worth individuals and institutional investors in general,” McCulloch told Financial Advisor. “Many of our clients who are fund advisors are keen to bring interval funds to the retail investor market, which represents a huge untapped pool of assets that many have not previously accessed.”

However, the investments and risks that exist within iCEFs as opposed to other investment vehicles, such as mutual funds, are different.

“Interval funds must meet ongoing tender requests, which are typically every quarter,” Flynn said. “To meet these tenders, many interval funds will take cash received from new investors and use it to fund redemptions for exiting investors.”

The iCEF wrapper makes it easier for alternative managers to peddle investment strategies that apply to the private fund space to retail investors but the potential downside is being unable to fully redeem an investment immediately.

“It depends on the amount of redemptions requested by other investors,” McCulloch told Financial Advisor Magazine. “This can be frustrating for the investor and the fund’s sponsors because they might have to wait in line.”

According to the Investment company act of 1940, at least five and up to 25 percent of an interval fund's shares outstanding are offered in redemptions quarterly, annually or semi annually.

“Some of the more sophisticated advisors purchase longer term private equity in seven and 10 year terms as well as credit assets and real estate,” Lucaci said.

Unlike open end mutual funds, iCEFs do not have the requirement that no more than 15 percent of assets must be illiquid.

“The ability to have a larger portion of illiquid holdings can be attractive,” McCulloch said. “We're seeing a lot more alternative credit assets that have not been made available through registered mutual funds but advisors can now give clients access to credit assets through iCEFs.

While there are other more liquid investment vehicles, such as ETFs, that replicate exposures in a hedge fund, iCEFs have unique selling points that advisors can use to interest their high net worth clients.

“Investing in iCEFs provides a degree of diversification by protecting from volatility and presenting different opportunities, such as a lack of correlation across the portfolio,” said Corcoran, director of strategic solutions at PivotalPath. “iCEFs will protect when equities are down.”

As for fees, iCEFs typically have management fees but incentive fees are rare.

“It's tough for advisors to work with an iCEF that includes incentive fees because they can only be sold to qualified investors,” said McCulloch. “The average investor is not a qualified investor, which is why not many iCEFs have incentive fees.”