In The Wall Street Journal, veteran columnist Jason Zweig warns investors about interval funds and the fees embedded in them. He explains that the funds that take on the most leverage can charge higher fees. He writes:
The assets that interval funds most commonly hold are private credit, or nontraded debt, and real estate. The funds often leverage their portfolios with borrowed money—up to a third of total assets.
Leverage has three main effects. It raises potential returns, enabling the fund to use borrowings to buy more assets. It raises potential risk, because falling values or rising interest rates could make the debt harder to pay off or even create the possibility of default. And, for many managers, it raises fees.
About a third of interval funds charge management fees on their total assets, including the money they’ve borrowed. That effectively means, as an investor, you’re paying fees not only on what the fund owns, but on what it owes.
Among the multibillion-dollar funds charging management fees on total assets are Carlyle Tactical Private Credit Fund, CION Ares Diversified Credit Fund and several from Pimco.
Carlyle and Ares declined to comment; Pimco said no one was available to comment. Industry insiders say a fund manager must also research assets that are purchased with leverage, justifying the management fee on the borrowed money.
You should wonder about that.
The prospectuses of several interval funds say their recent borrowings carry annual interest rates of almost 6% to more than 8.5%. An interval fund that borrows one-third of its total assets could be adding somewhere between 2% and nearly 3% to its annual expenses.
Then, on top of that, some managers charge management fees of 1% or more on the borrowed money.
All this can push an interval fund’s total annual expenses toward 7% annually.
Imagine a leveraged interval fund could buy a private loan with a yield of 12%. After all costs, barely 5% might be left for you.
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