Monday, March 23, 2015

High Priced Mediocracy

Interval funds - generally, continuously offered closed-end funds - give investors a chance to invest in multiple alternative investments they may not otherwise qualify for directly.  I am specifically discussing interval funds that focus on acquiring interests in business development companies, public REITs, private REITs, private equity real estate funds, private placements, and public, non-traded REITs.  These interval funds are similar to mutual funds, so suitability requirements are much lower than a direct investment into one of the non-traded investments owned by the interval fund. 

My knocks on interval funds are fees and performance.  Interval funds are funds-of-funds.  This means there are two layers of fees - one at the interval fund level and one at the underlying investment fund level.  The combined annual expenses can run three percent to five percent of total assets, which is a big hurdle for asset classes and investments - real estate and business development companies - that are historically income oriented, not growth focused.  Funds-of-funds will have average performance, as top performing funds' results are offset by the results from poor performing funds.  Over the long-term, for most investors, I don't believe the portfolio benefits of an interval fund - diversification and lower volatility - outweigh the performance issue, which is inherent because of interval funds' structures, and diminished further by their high fees.

1 comment:

Anonymous said...

Could not agree more. I love the idea but the fees are THE DETERRENT.