PrefBlog

There’s a new investment structure testing the waters … interval funds are an attempt to bridge the liquidity gap between investors and illiquid underlying investments:

Most of these portfolios are so-called interval funds, a quirky structure offered through financial advisers that allows investors to buy daily but sell only once per quarter. ​

Fees are stiff, generally running at least 2.5% annually.​
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Such interval funds offer to buy shares back from investors at predetermined dates and amounts — typically at least 5% of their shares four times a year. The idea is to offer enough liquidity for investors to get some of their money back over time, but not enough for them to yank it all back at one time.
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And how these funds value their shares, in the absence of a public market for much of their assets, is a departure from the traditional techniques of mutual funds.

These portfolios rely on quarterly valuations by appraisers provided by the property pools they invest in.
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But most of the interval funds are younger; several are too new to have weathered the storm of 2007-2009.

They use different techniques to bridge the awkward gap between quarterly appraisals on the underlying private properties and daily valuations of the funds’ shares.

Mr. Kamfar of Bluerock says his fund uses internal models and “daily observable inputs” to estimate interim values. Bluerock then reviews the daily pricing after actual valuations come in at quarter end. Mr. Kamfar says approximately 90% of the time, any adjustments are no more than one penny per share.

John Snowden, portfolio manager of the $230 million Resource Real Estate Diversified Income Fund, says the fund takes the forecast of the coming month’s pricing on commercial property as estimated by Green Street Advisors, a research firm, and divides it by the number of days in the month. The resulting number is added or subtracted to the fund’s daily net asset value. The share price is later adjusted as appropriate when actual values become available. Any adjustments rarely exceed a fraction of a percent, says Mr. Snowden.

Such pricing techniques might hold up fine in a downturn, but we won’t know for certain until one hits.

This entry was posted on Monday, March 20th, 2017 at 10:44 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.