Digging Into Interval Funds

Bill Ackman has been in the news a lot lately including his opinions about the hole that Harvard finds itself in. He thinks they will have a lot of trouble trying to sell any of its illiquid holdings that they have talked about as sort of a break glass in case of emergency action as they confront the possibility of losing federal funding. From the Bloomberg account of this story, Harvard has about 40% of the endowment in illiquid alternatives. Ackman believes the haircut involved with trying to sell could be about $13 billion. 

Coincidentally, I got an email touting the Denali Structured Return Strategy Fund. It is an interval fund which means it can be bought easily enough with symbol DNLIX but liquidity is limited to 5% of the fund every quarter so it would be difficult to get out of. 

The options from the pie chart is buying call spreads on the S&P 500 to add equity beta into the mix. "Closed end funds" from the 2024 annual report was a 41% allocation to Cliffwater Enhanced Lending Fund which is another interval fund with symbol CELFX. Consumer lending and trade receivables are different forms of lending that can be private and that I expect would typically bypass basic treasury and corporate debt. 

The track record is short but the reported performance looks pretty good. I threw in the Permanent Portfolio (PRPFX) to show that with any of these sorts of illiquid investments or complex investments, there is probably a simpler and cheaper way to get a similar result. I have to assume there is an issue with how often the fund really marks to market. I asked four different AIs about this and got essentially the same answer, that the daily NAV constitutes a marking to market. 

If DNLIX still owns a lot CELFX, you might wonder why someone wouldn't buy CELFX directly. If DNLIX is subject to the same sort of limited liquidity as anyone else buying CELFX, it would be like double gating your money. It turns out the minimum is very high and the info page says you have to be an accredited investor. DNLIX isn't as restrictive so maybe someone really wanting CELFX should buy DNLIX.

When I see a chart like CELFX though, my reaction is to wonder if it is too good to be true. If somehow, something went horribly wrong, how would you get out? Getting out of DNLIX would be similarly difficult but I don't get a too good to be true vibe from that one.

Better yet from my perspective though is there's no reason not to learn about these and maybe play around with their allocation if applicable but there is probably a simpler and cheaper way to do something similar. If there isn't a way to do it simpler and cheaper, is it worth it to you to lock your money up in this way? There's no single right answer, is it worth it to you? For me it is not worth it. 

Speaking of playing around with DNLIX' allocation.

The replication is 27% S&P 500 and the rest in client/personal holding SRDAX. Standpoint is also a client/personal holding. I don't know that the CAGR for the replication should be expected to continue but the volatility and some of the other stats have a decent chances of persisting. In terms of looking forward, it would be a good idea to add some foreign equity in there and as highly as I think of SRDAX, I wouldn't even put 1/4 of 73% into the fund. 

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