Why Interval Funds Look Attractive But Come With Hidden Costs

Interval funds sit in an awkward middle ground between closed-end and open-end funds, offering exposure to alternative assets like private equity and real estate that retail investors normally can’t touch. But before you jump in, here’s what actually matters.

The Liquidity Trap

Unlike regular mutual funds where you can sell anytime, interval funds only let you cash out at set periods—quarterly, semi-annually, or annually. Even then, you’re capped. The fund might only repurchase 5-25% of shares each interval. So if everyone wants out at the same time, you could be stuck. You won’t even know the exact price until after you commit to selling.

They’re Basically Illiquid by Design

The whole point of interval funds is to hold hard-to-sell assets—farmland, forestry, private equity funds, catastrophe bonds, business loans. These assets can’t move quickly, so the fund restricts your access to match. Unlike standard closed-end funds that trade on exchanges like stocks, interval funds don’t have a secondary market. Your only exit is those periodic repurchase windows.

The Fee Shock

Here’s where it gets expensive. Interval fund fees run higher than typical mutual funds or closed-end funds. You’re paying management fees, service fees, potential front-end sales charges, plus repurchase fees to cover the administration costs of those buyback periods. All those specialized holdings and expertise don’t come cheap.

Distribution Rates Are Misleading

Interval funds often flash high distribution rates—sometimes 5-8% or more—that make them look juicy compared to regular funds. But that number isn’t pure income. It can be a blend of interest, dividends, realized gains, and return of your original capital. That last part is essentially the fund giving you back your own money and calling it a “distribution.” Different sources mean different tax bills. That 7% yield could end up being much less after taxes and fees.

The Real Question: Are You Getting Paid for the Illiquidity?

The theory is solid—you’re taking on illiquidity risk, so you should get an “illiquidity premium” in returns. But check the actual track records. Some funds deliver. Others don’t. High fees can eat the whole premium anyway.

Before You Invest

Ask yourself: Can I realistically lock this money up for years? Do I understand what assets the fund actually holds? Have I modeled out the true after-tax, after-fee returns? If any answer is “no,” keep looking.