Interval funds pose a unique challenge in risk assessment because many of them trade at a very stable price for prolonged periods of time before price movements suddenly impact the holding’s volatility in a meaningful way. Many interval funds have built in NAV volatility limiters and unique trading reduction parameters. Often, their book assets require third-party, infrequent appraisals in order to update their NAV in accordance with their NAV methodology (such as real estate or insurance premium contracts). This further emphasizes the need to capture every “nook and cranny” of the NAV’s expressed volatility for a full, robust analysis.
Given the unique structure of these products, we’ve incorporated two impactful methodological inputs into Riskalyze’s methodology when analyzing interval funds:
When possible, we’ll utilize daily data points. An increase in the number of samples means less sampling error in the output, while more accurately depicting the inherent price fluctuations present with interval funds.
- Incorporation of long-term dependence into the risk analysis. This, of course, means moving away from the assumption that a given daily price change is completely independent from the rest. This helps Riskalyze better account for the periodic NAV jolts in many interval fund performance streams. Essentially, it’s not just the size of the variations that matter, but also their sequence.
These two additional methodological inputs help Riskalyze calculate risk and return statistics in a manner that sets a robust expectation with advisors and clients given the unique nature of interval funds. When funds are still young and have not experienced a full bear market, we still incorporate our Extrapolation methodology.
Note: At present this methodology is interval fund specific. For more information about our Non Traded Real Estate Investment Trust methodology, please see our knowledge base article.