“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.”