Interval funds are a fast-growing investment structure that provides periodic liquidity while allowing investors to access alternative assets that are often illiquid. Using comprehensive U.S. data from the SEC’s EDGAR database and Morningstar, we show that equity and fixed income interval funds hold, on average, 29% and 33% of highly illiquid assets, respectively, far exceeding the 15% limit for mutual funds and ETFs. We examine whether these funds compensate investors for limited liquidity and achieve efficient liquidity transformation. Consistent with our theoretical framework, interval funds outperform both passive and active ETFs in illiquid and information-insensitive categories, particularly in nontraditional bonds and bank loans, even after accounting for fees. In contrast, they underperform ETFs in liquid and information-sensitive equity categories, reflecting weaker market-based incentives for managers. Retail funds with institutional share classes outperform retail-only funds, suggesting improved monitoring by sophisticated investors. Consistent with superior selection, flows into institutional share classes also predict higher future returns. Finally, structured liquidity improves investor timing relative to daily tradable ETFs, highlighting the potential benefits of limited liquidity in democratizing access to alternative assets.
Stefano Pegoraro, University of Notre Dame
Sophie Shive, University of Notre Dame
Rafael Zambrana, University of Notre Dame