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Interval funds also much more flexibility than hedge funds do. When an investor first joins a hedge fund they must accept a “lock in” period that guarantees they’ll leave their money in the fund for at least one year. After that they may leave the fund at set intervals – 6-month intervals are common.

Compared to hedge funds, interval funds are much more liquid. Investors can’t opt out whenever they want, but they aren’t “locked in” for extensive periods either. Investors can buy into the fund whenever they like and they can leave at set intervals that are predefined. These intervals may be as little as one month or as much as six months.

Risk and Reward

One of the great attractions of the hedge fund for those that qualify is the possibility of above average returns. Mutual funds are limited in use of leverage (purchasing securities on margin). Hedge funds are not. Mutual funds are limited in the level of short selling that can take place in the fund. Hedge funds are not. Mutual funds are limited to publicly listed securities for typically 90% or more of the mutual fund portfolio. Hedge funds can purchase unlisted securities.  With additional opportunity comes additional risk, and there’s a chance the funds may be hit with substantial losses instead of large returns. This high degree of risk is one of the main reasons that these funds are only open to accredited investors that can potentially absorb any losses. If the fund managers explain their investment strategy to its investors ahead of time they can manage it as they see fit.

Interval funds can hold these alternative, riskier investments, and engage in more aggressive investment techniques, but must maintain more diversity among the underlying investments than a pure private or hedge fund. Illiquid investments such as real estate may be held, but the percentage of the portfolio in any one investment is restricted, and the interval fund must demonstrate its ability to create liquidity on the redemption cycles stated in the prospectus. So, in many ways the structure is a hybrid. The returns may not be as great, but the diversity of securities and requirement to offer liquidity makes them more secure.

How Hedge Funs Use Leverage

One of the most popular strategies used by hedge fund managers is the use of leverage to achieve significant gains. This means that the manager will borrow money to increase the holdings of the fund to invest in things that offer a high rate of return that will not only cover the borrowed money, but also offer a substantial return as well. This strategy risky is because if the investment does not go as planned the fund may not have the money to pay back the cash it borrowed, causing the fund to fail.