Miguel Sosa is a client portfolio manager at Bluerock, where he works alongside senior management and portfolio teams to author institutional research pieces on alternative investments, proper portfolio construction and optimal asset allocation.
Russ Alan Prince: What factors are contributing to the growing popularity of interval funds, and how do they differ from traditional mutual funds or closed-end funds?
Miguel Sosa: Bluerock was one of the first to adopt and provide the retail audience access through an interval fund structure, which allows investors and advisors to invest in alternatives with low minimums and provide a myriad of benefits. A primary benefit that interval funds provide investors is access to alternative investment strategies that are typically only available to institutions, including private equity, real estate and private credit.
Another advantage is making illiquid investments and capturing the illiquidity premium. Interval funds can invest up to 95% of net assets in non-daily liquid investments, allowing these funds to capitalize on what is known as the illiquidity premium—potentially higher returns for asset classes that are not easily accessible to most investors. Additionally, while alternative investments are often known for their illiquidity, interval funds offer a mandated level of liquidity by providing periodic redemption opportunities, typically quarterly.
Active management is another benefit of interval funds, like mutual funds, which invest in a diversified pool of securities with the ability to actively buy and sell assets, providing the opportunity to create alpha and generate higher risk-adjusted returns. Interval funds are also professionally managed by investment teams specializing in alternative investments. These managers conduct thorough due diligence, research and monitoring of the underlying investments to make informed decisions, which is particularly valuable in navigating alternative investment complexities. Interval funds are also subject to the 1940 Investment Company Act Funds with significant regulatory oversight, offering an additional layer of investor protection.
Like traditional open-end mutual funds, interval funds provide daily NAV pricing and transparency, continual access and direct redemptions at NAV. Interval funds differ in that they offer investors liquidity by providing periodic redemption, which allows them to invest up to approximately 95% in illiquid assets. In contrast, an open-end mutual fund is limited to 15%. As such, interval funds typically provide better access to true alternative asset classes.
Like a closed-end fund such as an ETF, interval funds seek to offer greater access to less liquid investments but differ in that they are a continuous offering, and redemptions are executed at NAV versus a public trading price which may be at a discount or premium to the underlying NAV of the fund’s assets.
Prince: What have been some of the challenges facing advisors when incorporating alternative investments into their clients’ portfolios, and how has Bluerock sought to dismantle them?
Sosa: Some of those initial hurdles that interval funds have solved have been minimum investment requirements, fee structures, liquidity, transparency levels, cumbersome subscription processes and visibility into the operations of the portfolios.
Investment structures like interval funds have helped eliminate these obstacles by providing lower minimum investments of around $1,000 to $2,500, reduced fee structures and caps on fee expenditures and/or fees that are aligned with the performance of the investment, monthly and/or quarterly liquidity, daily or monthly pricing and multiple share classes to accommodate a wide range of shareholders and advisors. As a result, expectations are that alternative asset holdings will grow exponentially as advisors increase allocations of client capital to alternative investments, which we believe is moving from single-digit allocations to nearly 20%.
Prince: The fixed-income asset class is very broad, why should individual investors consider alternative credit in today’s market environment?
Sosa: Indeed, fixed income is extremely broad, with many opportunities beyond the public bond market. Many investors today have a meaningful allocation within the broad fixed-income category—typically 40%. Unfortunately, traditional fixed income failed to deliver positive returns in 2022, with the widely used Bloomberg U.S. Aggregate Bond Index delivering the worst year in U.S. history with a return of -13.0%.
A growing category within fixed income has been alternative credit as investors search for higher real yields. However, this category has been historically limited to institutions because of large investment minimums and limited liquidity. This accessibility problem is being solved through interval funds. Alternative credit is distinct from traditional fixed-income securities such as U.S. Treasuries and high-quality corporate bonds, and targets equity-like total return potential and meaningful income.
Within alternative credit, we are bullish on structured credit, specialized securities that pool certain debt obligations and subsequently provide access to a wide range of debt investors such as banks, insurance companies, and pension plans.
One example is collateralized loan obligations (CLOs) that are structured with senior secured loans as the debt obligations for cash flow generation. These products have various embedded structural safeguards and mandated covenants that help reduce the risk for investors across the different tranches. This has historically contributed to lower realized loss rates compared to many other fixed-income securities and almost all other structured credit investments.
CLOs have delivered both high income and very strong total returns through several market cycles, including periods with rising rates and inflation. We believe CLO equity has a strong asymmetric return/risk profile in favor of the investor, particularly given the current market environment.
This information is educational in nature and does not constitute a financial promotion, investment advice, or an inducement or incitement to participate in any product, offering, or investment. Bluerock is not adopting, making a recommendation for, or endorsing any investment strategy or particular security. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. All investing is subject to risk, including the possible loss of principal. Bluerock cannot guarantee that the information herein is accurate, complete, or timely. Past Performance does not guarantee future results. V-23-64
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.
