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You should have a plan for what to say and do when your best client walks into her annual review and asks, “What do you think of interval funds?”
Interval funds have gone from niche to mainstream over the past decade, with Morningstar estimating roughly 40% annualized growth and assets of $116 billion as of June 2025, driven largely by demand for private credit and other income-oriented alternatives.1
For advisors, that growth presents both a real opportunity and a real risk.
Interval funds are being positioned as a “friendlier” way to access private markets — 1099 tax reporting (rather than K-1s), daily subscriptions, no capital calls, and periodic liquidity. But interval funds can be easily overused if advisors don’t understand the mechanics under the hood.
Below is a primer on interval funds to help prepare you for your next client conversation.
How Interval Funds Really Work
In a traditional mutual fund or ETF, only up to 15% of the portfolio can be in illiquid securities. By contrast, an interval fund can invest 100% of its assets in illiquid positions — private credit, real estate, private equity, venture capital, or other hard-to-trade exposures.
Investors can usually get in daily, but they can only get out at predefined intervals — most often quarterly. At each interval, the fund offers to repurchase a set percentage of its outstanding shares — commonly about 5% of net assets. If redemption requests exceed that amount, investor orders are filled on a pro-rata basis.
That can lead to uncomfortable outcomes: If 10% of shareholders try to redeem and the gate is 5%, each investor may only receive roughly half of what they requested. In periods of stress, we’ve seen investors receive as little as 20% of their requested redemption, with the remainder stretched over multiple quarters.
The key point: Interval funds should be treated as illiquid holdings, despite the marketing emphasis on quarterly liquidity.
Why Clients, Advisors, and Asset Managers Like Them
It’s not hard to see why interval funds have become a darling of the industry.
For clients, they feel simple. There are no capital calls, no vintage-year commitments, no secondary sales at steep discounts. Purchases happen like any other fund; tax reporting arrives on a 1099, similar to a mutual fund or ETF.
For advisors, interval funds offer a relatively clean way to introduce alternatives: a ticker symbol, an alts narrative, the look and feel of a “sophisticated” institutional strategy, and a manageable operational burden.
For asset managers, interval funds provide evergreen capital. Instead of launching a new closed-end or vintage fund every few years, a manager can continuously raise assets into the same structure, building track records and scale.
Properly matched to the right clients, interval funds can help democratize access to strategies that historically were available only to qualified purchasers and institutions.
The Hidden Cost of “Semi-Liquidity”: Cash Drag
The same features that give clients limited liquidity can erode the investment case. Managers must hold enough cash or liquid securities to meet periodic redemptions, which creates performance drag.
By way of example, suppose a fully invested VC portfolio might reasonably target a 12% return. If an interval structure forces the manager to hold 20% of the portfolio in cash or very low-yielding assets to handle quarterly redemptions, the portfolio’s return drops by roughly 2.4 percentage points (20% × 12%), from 12% to 9.6%.
For truly long-dated, highly illiquid assets like private equity or venture capital, that drag can be hard to justify versus traditional drawdown funds where capital is called over time and invested more fully. In fact, Obsidian CIO reviewed every PE/VC interval fund it could find and declined to recommend any, largely because it could not get comfortable with the structural cash drag.
By contrast, semi-liquid credit strategies — such as shorter-duration private credit or credit REITs — may fit the wrapper better, as they allow the asset manager increased flexibility in managing to its mandate.
Liquidity Risk When Performance Turns South
The other major risk appears when performance disappoints and investors rush for the exits. The manager of the fund can be forced into difficult choices, such as:
- Selling what’s liquid, even if it’s not what they’d choose to sell from an investment perspective.
- Potentially accepting poor pricing, as secondary buyers know the fund “needs” liquidity.
- Diverting time and attention from research and portfolio construction to cash-flow management.
That feedback loop — poor performance, heavy redemptions, forced selling, further NAV pressure — is precisely what advisors need to anticipate and explain to clients before allocating.
The Bottom Line for Advisors
Interval funds can be a powerful addition to the advisor toolkit. They can broaden access to institutional-style strategies and help build more diversified portfolios for clients who would otherwise be shut out of private markets.
They are one tool — not the tool — for implementing alternatives. Used indiscriminately, interval funds can concentrate liquidity and structural risk in ways that are only evident when markets undergo stress.
Advisors who treat interval funds as genuinely illiquid, underwrite the cash-drag and liquidity mechanics, and carefully match wrappers to clients and exposures will be best positioned to harness their benefits — without turning today’s “simple” solution into tomorrow’s headache.
Endnote
1https://www.morningstar.com/alternative-investments/investors-flock-semiliquid-funds-income,
Joe Halpern is managing partner of Obsidian CIO. Request his new white paper, How to Scale Your RIA to $1 Billion and Beyond.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
