Interval Fund Investing: The Hybrid Alternative That’s Outperforming Traditional REITs in a Rising Rate Environment

Discover how interval funds offer superior yields and inflation protection compared to traditional REITs in rising rate environments, with exclusive performance metrics and tax strategies for accredited investors seeking stability with enhanced returns.

Your standard disclaimer about financial advice was probably boring… this is not!

Introduction: The Silent Wealth-Builder You’re Probably Ignoring

Let’s be honest — when most investors think about real estate investment, their minds automatically jump to traditional REITs. They’re familiar, they’re easy to trade, and they’ve been the darling of income-focused portfolios for decades.

But what if I told you there’s a hybrid investment structure that’s been quietly outperforming traditional REITs during periods of rising interest rates, while maintaining tax advantages that would make your accountant’s eyebrows rise faster than inflation in the 1970s?

[adjusts imaginary glasses for dramatic effect]

Welcome to the world of interval funds — the sophisticated middle ground between the liquidity of public markets and the enhanced returns of private investments. While they’ve been around since the 1990s, interval funds have experienced explosive growth in recent years, with assets under management nearly quadrupling from just $18.6 billion in January 2020 to $93.4 billion in January 2025, according to Morningstar figures reported by Pitchbook. That’s a growth pattern that demands attention [Alter Domus]

In this analysis, I’m going to break down exactly why interval funds deserve a place in your investment toolkit, particularly in the current rising rate environment that has traditional REITs sweating. And no, I won’t drown you in incomprehensible financial jargon that requires an MBA to translate — I promise to keep this as straightforward as possible while still delivering insights you likely won’t find in mainstream financial publications.

What Exactly Is an Interval Fund? (And Why Should You Care?)

Before diving into performance comparisons, let’s establish what makes interval funds tick.

An interval fund is a type of closed-end investment company that combines features of both open-end and closed-end funds. Unlike traditional mutual funds that offer daily liquidity, interval funds only provide liquidity at predetermined intervals — typically quarterly — when they repurchase a limited percentage of outstanding shares directly from shareholders at net asset value (NAV).

Interval funds are the financial equivalent of having an open relationship with liquidity — you can’t see each other whenever you want, but the scheduled meetups are guaranteed and drama-free.

Why this structure matters:

1. Enhanced Return Potential: By not having to maintain cash reserves for daily redemptions, interval funds can fully invest capital and access less liquid, potentially higher-yielding assets.
2. NAV Stability: Unlike publicly traded REITs that experience price fluctuations based on market sentiment, interval funds price directly at NAV, reducing volatility unrelated to underlying asset values.
3. Access to Private Markets: Interval funds provide retail investors with access to institutional-quality private real estate, credit, and other alternative investments typically reserved for qualified purchasers.

The structure isn’t for everyone, particularly investors who might need quick access to their capital. But for those with longer time horizons who want to potentially enhance yield while reducing volatility, interval funds represent an intriguing opportunity that bridges the gap between public and private investments.

Structural Differences: Interval Funds vs. REITs, MLPs, and BDCs

Now let’s examine how interval funds structurally differ from other popular income-focused investment vehicles.

[nods knowingly like that one friend who’s been there]

REITs vs. Interval Funds: The Fundamental Distinctions

Feature	Traditional REITs	Interval Funds
Liquidity	Daily trading on exchanges	Periodic (typically quarterly) redemptions
Price Determination	Market-based (can trade at premium/discount to NAV)	Direct NAV pricing
Investment Universe	Primarily public real estate securities	Can include private real estate and broader alternatives
Interest Rate Sensitivity	Highly sensitive to rate changes	Reduced sensitivity through private market access
Minimum Investment	No minimum (for public REITs)	Varies, typically $5,000-$25,000
Investor Requirements	None	None, though some distributors may require accredited status

REITs are required by law to distribute at least 90% of their taxable income to shareholders, which limits their ability to reinvest for growth. Interval funds have more flexibility in this regard, enabling them to selectively retain capital for opportunistic investments.

MLPs and BDCs: Similar But Different

Master Limited Partnerships (MLPs) and Business Development Companies (BDCs) share some characteristics with interval funds:

• MLPs typically focus on energy infrastructure and offer tax advantages through pass-through structures but come with complex K-1 tax reporting. Interval funds issue simpler 1099 forms.
• BDCs provide financing to middle-market companies and offer high yields, but they experience significant market volatility and are heavily regulated in terms of leverage and investment types.

The difference between interval funds and these alternatives is like the difference between a Swiss Army knife and specialized tools — one offers versatility across market conditions; the others excel in specific environments.

The Liquidity Mechanics That Traditional Financial Advisors Don’t Discuss

The limited liquidity feature of interval funds is often portrayed as a drawback, but sophisticated investors understand it’s actually a strategic advantage when properly utilized.

How Redemption Windows Actually Work

Interval funds are required by Rule 23c-3 of the Investment Company Act of 1940 to make repurchase offers at regular intervals, with a minimum of 5% of outstanding shares offered for redemption. Most interval funds offer repurchases quarterly, though some use monthly or annual intervals.

Here’s what the process typically looks like:

1. The fund announces a repurchase window (usually open for 2-3 weeks)
2. Investors submit redemption requests during this period
3. If redemption requests exceed the offered percentage (e.g., 5%), redemptions are prorated
4. Payment is made within 7 days of the repurchase pricing date

[gestures vaguely at the universe]

This structure creates what I call the “liquidity paradox” — by accepting some liquidity constraints, investors can potentially access higher returns through the illiquidity premium. Data from KPMG shows that interval funds can provide 1.5% to 3% higher potential returns compared to similar strategies in daily-liquid vehicles. KPMG

Strategic Implications for Portfolio Construction

For advisors and investors, understanding this liquidity mechanism has several strategic implications:

1. Cash Flow Planning: Investors should align expected liquidity needs with the fund’s repurchase schedule
2. Position Sizing: Initial allocations should consider the repurchase limitations
3. Complementary Allocations: Pairing interval funds with more liquid investments creates a balanced liquidity profile
4. Redemption Strategy: During market stress, having a predetermined redemption strategy prevents emotional decisions

The Performance Edge: Why Interval Funds Shine in Rising Rate Environments

Now let’s get to the heart of the matter — why interval funds have been outperforming traditional REITs in rising interest rate environments.

Historical analysis reveals a fascinating pattern:

Comparative Performance During Rate Hike Cycles

While traditional REITs have historically been sensitive to interest rate increases (with an average underperformance of 2-4% relative to broader markets during the first six months of rate hike cycles), interval funds focused on real estate have demonstrated remarkable resilience.

According to an analysis from Bluerock, during the 2015-2018 Federal Reserve tightening cycle, real estate interval funds delivered average annualized returns of 6.8% with volatility of just 1.7%, compared to the FTSE NAREIT All Equity REITs Index’s 4.7% return with 13.9% volatility [Bluerock]

What Drives This Outperformance?

Three key factors explain this performance differential:

1. Direct Access to Private Markets: Interval funds can invest in private real estate directly, where valuations tend to lag public market adjustments and offer smoother return profiles.
2. Strategic Flexibility: The structure allows managers to pursue opportunistic investments across real estate sectors, adjusting allocations as market conditions change without facing redemption pressure.
3. Enhanced Income Generation: By accessing less liquid investments like private credit, real estate debt, and specialized financing arrangements, interval funds can generate higher yield even in challenging rate environments.

Traditional REITs react to interest rate changes like someone with a bad caffeine habit — jittery and unpredictable. Interval funds are more like that friend who maintains composure regardless of what chaos is unfolding around them.

This performance advantage becomes particularly meaningful in the current economic environment, where interest rate volatility continues to challenge traditional fixed-income investments.

Tax Implication Breakdown: A Tale of Two Investors

One of the most compelling advantages of interval funds is their tax efficiency, which varies significantly based on investor profiles. Let’s examine how different investors benefit:

High-Income Professional (45-55 Years Old)

For high-income professionals in peak earning years, interval funds offer several tax advantages:

1. RIC Status Efficiency: Interval funds are typically structured as Regulated Investment Companies (RICs), avoiding the double taxation issue that affects traditional C-corporations.
2. Return of Capital Distributions: A portion of distributions may be classified as return of capital (ROC), which is tax-deferred until the investment is sold or basis reaches zero.
3. 20% Pass-Through Deduction: Under current tax law, many interval fund distributions qualify for the 20% deduction on qualified business income under Section 199A, effectively reducing the tax burden.

For a high-income investor in the 37% federal tax bracket, these advantages can translate to 1.0-1.5% in enhanced after-tax yield compared to traditional REIT investments [Brookfield Oaktree Wealth Solutions].

Retired Investor (65+ Years)

For retired investors, the tax benefits align differently:

1. Simplified Tax Reporting: Interval funds issue Form 1099-DIV instead of the K-1 forms required for direct partnership investments, simplifying tax preparation.
2. Tax-Deferred Growth Potential: The ROC component allows retirees to receive distributions while deferring taxes, enhancing cash flow efficiency.
3. Estate Planning Benefits: Unlike direct real estate investments, interval fund shares receive a step-up in basis at death, potentially eliminating deferred tax liability.

[adjusts imaginary reading glasses]

What’s particularly valuable for retired investors is the reduced tax drag on income — critical for those relying on investment income to fund retirement expenses. Interval funds can effectively deliver 0.75-1.25% higher after-tax yield compared to similar investments without these tax advantages.

Portfolio Allocation Models: Finding Your Sweet Spot

Incorporating interval funds into a portfolio requires strategic thinking about allocation size, complementary investments, and time horizon. Let’s explore practical allocation models for different investor risk tolerances:

Conservative Allocation (15-25% Alternative Assets)

For conservative investors, interval funds can serve as a volatility dampener and income enhancer:

• Interval Fund Allocation: 5-10% of total portfolio
• Complementary Investments: Short and intermediate-term bonds, dividend-paying stocks, cash equivalents
• Expected Outcome: Enhanced income with minimal increase in overall portfolio volatility
• Ideal Fund Types: Multi-strategy interval funds with emphasis on senior secured lending and core real estate

Moderate Allocation (25-35% Alternative Assets)

Moderate investors can use interval funds to enhance returns while maintaining reasonable liquidity:

• Interval Fund Allocation: 10-20% of total portfolio
• Complementary Investments: Blend of fixed income, dividend stocks, and select growth investments
• Expected Outcome: Meaningful yield enhancement with moderate increase in illiquid allocation
• Ideal Fund Types: Sector-focused real estate interval funds, private credit interval funds

Aggressive Allocation (35%+ Alternative Assets)

For aggressive investors comfortable with higher illiquidity in exchange for return potential:

• Interval Fund Allocation: 20-30% of total portfolio
• Complementary Investments: Growth stocks, opportunistic fixed income, direct alternative investments
• Expected Outcome: Maximized illiquidity premium capture with significant portfolio yield enhancement
• Ideal Fund Types: Specialized interval funds focusing on value-add real estate, opportunistic credit, and private equity secondaries

Finding your ideal allocation to interval funds is like seasoning a complex dish — too little and you won’t notice the difference; too much and it overpowers everything else. Aim for that perfect balance.

Homework Assignment: Your Personal Interval Fund Suitability Analysis

Before rushing to add interval funds to your portfolio, I challenge you to complete this quick self-assessment to determine if they’re right for your situation:

1. Can you comfortably commit capital for at least 2-3 years without needing access?
2. Are you seeking enhanced yield without significantly increasing traditional market risk?
3. Is your portfolio large enough to maintain adequate liquid investments alongside interval fund allocations?
4. Have you researched the specific redemption terms of any interval fund you’re considering?
5. Are you working with a tax professional who understands the nuanced tax treatment of these vehicles?

If you answered “yes” to at least four of these questions, interval funds may be worth exploring further as part of your investment strategy.

The Critical Gap: Why Current Analysis Falls Short

Most mainstream coverage of interval funds treats them as niche products without examining their performance advantages in changing rate environments. This represents a significant gap in current investment literature.

Conventional wisdom suggests that all real estate investments suffer during rising rate periods. However, the data tells a more nuanced story. While public REITs often experience price declines when rates rise (due to both higher borrowing costs and investor rotation to fixed income), interval funds investing in private real estate can actually benefit from several factors:

1. Valuation Lag Effect: Private real estate valuations adjust more gradually than public markets, reducing short-term volatility.
2. Negotiating Power: Fund managers can leverage market dislocations to negotiate better entry points for new investments during uncertain rate environments.
3. Inflation Protection: Many interval funds investing in real estate have integrated inflation adjustment mechanisms in their underlying lease structures.
4. Reduced Correlation: The semi-liquid structure results in returns that are less correlated with both public equity and fixed income markets.

This performance differential isn’t widely understood because most financial media focuses on daily-priced, liquid investments that are easier to track and report on. The semi-liquid interval fund structure simply doesn’t fit neatly into conventional investment categorizations.

The Future of Interval Fund Investing

[nods knowingly like that one friend who predicted Bitcoin at $10]

Looking forward, several trends suggest interval funds will continue gaining prominence:

1. Democratization of Alternatives: Interval funds represent the vanguard of a broader trend making institutional-quality alternative investments accessible to individual investors.
2. Innovation in Product Design: Newer interval funds are incorporating creative features like monthly tenders, strategic liquidity sleeves, and hybrid public-private approaches.
3. Technology Integration: Improved investor portals and digital platforms are making interval fund investments and redemption processes more user-friendly.
4. Regulatory Evolution: Ongoing regulatory developments are likely to further clarify and potentially enhance interval fund structures.

The interval fund market grew from just 14 funds managing approximately $2.9 billion 10 years ago to around 100 funds today, and this expansion shows no signs of slowing [Diamond Hill].

Conclusion: The Strategic Advantage for Savvy Investors

In a financial world increasingly characterized by volatility, yield compression, and inflation concerns, interval funds represent a compelling middle ground for investors seeking enhanced returns without venturing into completely illiquid investments.

Their structural advantages in rising rate environments, tax efficiencies, and access to institutional-quality alternative investments make them particularly valuable for accredited investors looking to optimize their portfolios.

In the investment world, the biggest opportunities often exist in the spaces between conventional categories. Interval funds thrive precisely in this middle ground, offering a unique blend of attributes that neither fully liquid nor fully illiquid investments can match.

However, these benefits come with the trade-off of reduced liquidity, making them suitable primarily for investors with longer time horizons and stable financial foundations.

As with any investment strategy, the key is alignment — ensuring that the characteristics of interval funds match your specific financial goals, time horizon, and liquidity needs. For investors willing to sacrifice some liquidity in exchange for potentially enhanced risk-adjusted returns, interval funds deserve serious consideration as a portfolio component.

Are interval funds right for you? That depends on your individual circumstances. But understanding their unique characteristics and strategic advantages gives you another powerful tool in your investment arsenal — one that mainstream financial media hasn’t fully appreciated yet.

Homework: Next time someone at a dinner party starts bragging about their REIT dividends, casually ask them about their interval fund strategy. Their blank stare will tell you everything you need to know about being ahead of the curve.

— The Sage of Straight Talk