The world of real estate financing has changed dramatically since the 2008 financial crisis. In the years that followed, new regulations made traditional banks more selective about lending, creating a significant funding gap for high-quality commercial real estate projects. This shift opened the door for a new class of lenders to emerge. Real estate debt funds stepped directly into this void, providing the flexible and timely capital that developers and property owners needed. Today, they are no longer a niche alternative but a fundamental part of the industry, offering investors a way to participate in a market once dominated by large financial institutions and generate income from the financing of real estate.
Key Takeaways
- Act as the lender, not the landlord: Real estate debt funds generate steady income from interest payments on commercial property loans. Because your investment is secured by the physical real estate, it has a layer of protection that direct property ownership or equity investments often lack.
- Due diligence is non-negotiable: Not all funds are created equal, so it’s crucial to look beyond the advertised returns. A thorough evaluation should include the fund manager’s experience, the specific lending strategy, and the approach to risk, which is often reflected in metrics like Loan-to-Value (LTV) ratios.
- Diversify with an income-focused alternative: These funds can balance a portfolio by providing an income stream with low correlation to public stock and bond markets. They offer exposure to the real estate sector with a different risk profile than equity REITs, focusing on capital preservation and consistent cash flow.
What Are Real Estate Debt Funds?
Think of real estate debt funds as pools of private capital that act like a bank, but specifically for commercial real estate. Instead of investing in stocks or buying properties outright, these funds lend money to developers and property owners. The loans are used for things like acquiring new buildings, funding construction, or refinancing existing properties. The key here is that every loan is secured by a hard asset—the property itself. This structure provides a layer of security for investors. It’s a way to get exposure to the real estate market without the hands-on responsibilities of being a landlord. For many financial professionals, these funds offer a compelling alternative for clients seeking steady income.
How Do Real Estate Debt Funds Work?
The mechanics of how real estate debt funds work are fairly straightforward. The fund gathers capital from investors and then provides short-term loans for commercial projects—think apartment complexes, office buildings, or shopping centers. The fund’s income comes primarily from the interest borrowers pay on these loans, which can often be 9% or higher, plus any associated fees. This interest is then distributed to the fund’s investors, creating a steady stream of cash flow. And what happens if a borrower can’t repay the loan? Because the property itself is the collateral, the fund has the right to take ownership, which helps protect the initial investment.
The Fund Manager’s Role
The success of a real estate debt fund hinges almost entirely on its manager. This person (or team) is responsible for sourcing deals, underwriting loans, and managing the portfolio. A crucial part of their job involves the strategic use of leverage—or borrowed capital—to potentially increase returns. It’s vital to understand a manager’s philosophy on leverage to ensure it aligns with your own risk tolerance. When evaluating a fund, look for managers with deep experience, a transparent process, and strong relationships with lenders, as these connections often lead to more favorable loan terms and better opportunities for the fund.
What Kinds of Loans Do These Funds Provide?
Real estate debt funds are versatile, offering a range of loan types that cater to different project needs and investor risk appetites. They often step in where traditional banks might not, providing flexible and timely capital for real estate developers and owners. The loans these funds provide can be categorized based on their position in the capital stack—meaning, where they stand in line to be repaid if the borrower defaults. Understanding these distinctions is key to aligning a fund’s strategy with your own financial goals.
The type of loan a fund focuses on directly influences its risk and return profile. Strategies can range from lower-risk senior debt, which prioritizes capital preservation and steady income, to higher-yield mezzanine debt for those comfortable with more risk. Funds also specialize in providing short-term money for specific situations, such as acquiring a property quickly or funding a new build from the ground up. By offering everything from bridge loans to construction financing, these funds play a critical role in the commercial real estate market. Before investing, it’s important to understand what kind of financing a fund provides so you can assess if it fits your portfolio. Let’s look at the four main types of loans you’ll encounter.
Senior Debt
Senior debt is the most common and generally the most secure type of loan provided by real estate debt funds. Think of it as having first dibs. These are senior secured loans, meaning they are backed by the physical property as collateral and hold the first repayment position if the borrower runs into trouble. This priority status makes senior debt the lowest-risk loan type within a property’s capital structure. For investors, this translates into consistent, income-driven returns generated from the borrower’s interest payments. If your primary goal is to receive a steady stream of income while preserving capital, a fund that focuses on senior debt could be a suitable component of your investment strategy.
Mezzanine Financing
Mezzanine financing sits between senior debt and equity in the capital stack. It’s a hybrid form of financing that is subordinate to the senior loan but has priority over the equity investors. Because it carries more risk—lenders are second in line for repayment—it typically offers a higher potential return to compensate for that risk. Developers often use mezzanine loans to fill the funding gap between the senior loan and the equity they can contribute. For investors with a greater appetite for risk, funds that include mezzanine financing can offer more attractive yields than those focused solely on senior debt. It’s a way to participate in a project’s potential upside without taking on full equity risk.
Bridge Loans
Just as the name suggests, bridge loans provide a short-term financial bridge. They are temporary loans used to cover a gap until a property is sold or long-term financing is secured. For example, a real estate investor might use a bridge loan to purchase and renovate an apartment building quickly. Once the renovations are complete and the property is stabilized with tenants, they can refinance with a traditional, long-term mortgage. Real estate debt funds are ideal providers of bridge loans because they can often fund them much faster than conventional banks, giving borrowers a competitive edge in fast-moving markets. These loans typically have terms ranging from a few months to a few years.
Construction Loans
Construction loans provide the capital needed to build a new property or complete a major renovation. These loans are generally considered higher risk because the underlying asset—the building—is not yet complete and generating income. To manage this risk, the funds are not paid out in one lump sum. Instead, the capital is disbursed in stages, or “draws,” as the project meets specific construction milestones. This approach helps ensure the project stays on track and on budget. Real estate debt funds have become a vital source of construction financing, offering developers the flexible and responsive capital they need to get new projects off the ground, especially when traditional lenders are more cautious.
Why Invest in Real Estate Debt Funds?
Real estate debt funds can be a compelling addition to a well-rounded investment strategy. They offer a unique combination of benefits for investors seeking income, stability, and diversification. By lending money to real estate projects instead of buying them outright, these funds create opportunities for steady returns while managing risk. Let’s look at the primary reasons investors are drawn to this asset class.
Generate Stable Income Streams
A primary attraction of real estate debt funds is their ability to generate consistent income. Returns are driven by the interest payments borrowers make on their loans—much like collecting mortgage payments, but on a commercial scale. These funds often issue senior secured loans, which are first in line for repayment, adding a layer of security. Because the fund’s income is based on contractually obligated loan payments, it can provide a predictable cash flow stream for investors, with yields that are often competitive with other income-focused investments.
Diversify Your Portfolio
Adding real estate debt to your portfolio is an effective way to diversify beyond traditional stocks and bonds. This asset class has a low correlation to public markets, which can help smooth out overall portfolio performance during market fluctuations. Since traditional banks became more selective with lending, private debt funds have stepped in to finance high-quality commercial properties. As a result, real estate debt has matured into a mainstream component of a diversified investment strategy, offering a stable alternative for exposure to the real estate sector without direct property ownership.
Protect Your Investment with Hard Assets
When you invest in a real estate debt fund, your capital is backed by a tangible asset: the property itself. Each loan is secured by real estate collateral, which provides significant downside protection. If a borrower defaults, the fund manager can foreclose on the property and sell it to recover the investment. This is fundamentally different from many equity investments, where a business failure could mean a total loss. The presence of a hard asset as security offers a buffer against loss and contributes to a more conservative risk profile than real estate equity.
Hedge Against Interest Rate Changes
In an environment of shifting interest rates, real estate debt funds can be particularly appealing. Many loans issued by these funds have floating rates tied to a benchmark like the Secured Overnight Financing Rate (SOFR). When benchmark rates rise, the interest rate on these loans adjusts upward, increasing the income paid to the fund and its investors. This feature provides a natural hedge against inflation and rising rates, a characteristic not always found in traditional fixed-income investments that can lose value when rates go up. This adaptability makes them a strategic tool for different economic cycles.
What Are the Risks Involved?
Like any investment, real estate debt funds come with their own set of risks. Understanding these potential downsides is the first step toward making an informed decision and building a resilient portfolio. While these funds are structured to manage risk, it’s important to know what factors can influence their performance. By getting familiar with the potential challenges, you can better evaluate if this type of investment aligns with your financial goals and risk tolerance. At Waterloo Capital, we believe a clear understanding of both the opportunities and the risks is fundamental to a sound investment strategy. Let’s walk through the primary risks you should consider.
Default and Credit Risk
The most direct risk in any lending activity is the chance that the borrower won’t be able to pay back their loan. This is known as default or credit risk. If a property developer fails to make their payments, it can impact the fund’s returns. While real estate debt funds are generally considered lower risk than equity investments, the possibility of default always exists. To manage this, fund managers often secure loans with lower loan-to-value (LTV) ratios than traditional banks, meaning there’s more property value protecting the loan. This provides a cushion in case the property has to be sold to recoup the investment.
Market Volatility and Leverage
Many funds use leverage to increase potential returns. In simple terms, the fund makes a loan and then may borrow against that loan from a bank. This frees up capital, allowing the fund to make more loans and spread its investments further. However, leverage is a double-edged sword and can also amplify losses. If the real estate market takes a downturn and property values fall, the fund’s leveraged positions become riskier. A deep understanding of current market trends is crucial for managers using this strategy, as tough economic conditions can make leverage more difficult to manage effectively.
Liquidity and Lock-Up Periods
An investment in a real estate debt fund is not as liquid as buying a stock you can sell the next day. These funds typically have lock-up periods, which are set timeframes during which you cannot withdraw your capital. This structure is necessary because the underlying investments—real estate loans—are themselves illiquid and have specific terms that can last for several years. This lack of liquidity means you should be prepared to commit your capital for the duration of the lock-up period. It’s a key consideration, especially if you anticipate needing access to your funds on short notice, so always review the fund’s terms carefully.
Interest Rate Sensitivity
Changes in interest rates can affect a real estate debt fund’s profitability, particularly when leverage is involved. If the fund has borrowed money at a variable rate, a sudden rise in interest rates will increase its own borrowing costs. This can squeeze the margin between what the fund earns on its loans and what it pays on its debts, impacting overall returns for investors. Experienced fund managers often use hedging strategies or structure their loans with floating rates to mitigate this risk, but it remains a factor to watch. As an investor, it’s wise to understand how a fund’s portfolio might react to shifts in the broader interest rate environment.
How Have Real Estate Debt Funds Evolved?
The world of real estate financing looks very different than it did a few decades ago. What was once a field dominated by traditional banks has transformed into a dynamic market with new players and new rules. Real estate debt funds are at the center of this change, and understanding their evolution is key to seeing their role in today’s investment landscape. Their rise wasn’t accidental; it was a direct response to major shifts in the global financial system.
The Shift Away from Traditional Banks
The story really begins after the 2008 financial crisis. In the wake of the downturn, new regulations were put in place that made it more difficult and costly for traditional banks to lend on commercial real estate projects. Facing stricter capital requirements and heightened scrutiny, many banks pulled back, creating a significant funding gap in the market. Real estate debt funds stepped directly into this void. They began to provide the loans that banks used to offer, becoming a critical source of capital for developers and property owners who needed financing to move their projects forward.
The Growth of Alternative Financing
With banks taking a step back, the door was wide open for alternative lenders. Real estate debt funds grew rapidly to meet the demand, with the top 50 firms capturing over $224 billion in capital. These funds offer short-term financing for a wide range of projects, from apartment buildings and shopping centers to ground-up construction. What makes them so attractive to borrowers is their speed and flexibility. They can often close deals faster than banks and are willing to structure loans in more creative ways, making them a vital part of how commercial real estate projects get funded today.
Current Market and Capital Trends
Today, private debt is a cornerstone of real estate capital. In 2024, it accounted for 24.3% of all money raised for private real estate, the highest share in at least seven years. This shows just how integral these funds have become to the industry. Even in a slower overall market, the demand for this type of financing remains strong. In fact, half of the top 50 debt fund managers managed to raise more capital than they did the previous year, a testament to their resilience and the continued confidence investors have in this asset class. This trend highlights a permanent shift in how real estate is financed.
How Do Real Estate Debt Funds Compare to Other Investments?
To understand where real estate debt funds fit into a portfolio, it helps to compare them to other common investment types. Each option offers a different balance of risk, return, and income potential. Looking at these funds alongside real estate equity, traditional fixed-income products, and REITs can clarify their unique role and help you decide if they align with your financial goals. The right choice depends entirely on your objectives, whether you’re seeking steady income, long-term growth, or a mix of both.
Debt vs. Equity
Think of the difference between debt and equity as being the lender versus being the owner. When you invest in a real estate debt fund, you are acting as the lender. Your returns come from the interest payments made on the loans the fund provides. This position generally offers a more predictable income stream. Real estate equity, on the other hand, makes you a part-owner of the property. Your potential for returns is tied to the property’s appreciation in value and rental income, which can be higher but also carries more risk.
Debt investments are typically secured by the property itself, meaning if the borrower defaults, the fund can claim the asset. This provides a layer of protection that equity investments lack. For financial professionals and their clients, the choice between debt and equity often comes down to risk tolerance and the desire for consistent cash flow versus capital growth.
Debt vs. Traditional Fixed Income
At first glance, real estate debt funds might seem similar to traditional fixed-income investments like corporate or government bonds. Both generate income through interest payments. However, a key distinction is the underlying asset. Real estate debt is secured by tangible property, offering a hard asset backing that you don’t get with most corporate bonds. This can provide a greater sense of security and downside protection.
Additionally, many loans within these funds have floating interest rates. This feature can be particularly attractive, as it allows returns to adjust upward when benchmark rates rise, protecting your income from inflation. While bonds offer simplicity and liquidity, real estate debt funds can provide higher yields and a direct connection to the performance of the property market. You can explore more market analysis in our research and insights.
Debt vs. REITs
It’s easy to group all real estate investments together, but debt funds and Real Estate Investment Trusts (REITs) operate very differently. Most publicly traded REITs are equity-based; when you buy a share, you’re buying a small piece of a large portfolio of properties. Your returns depend on rental income and property value appreciation, much like direct equity ownership.
Investing in a real estate debt fund isn’t about owning property—it’s about financing it. You are providing the capital for others to buy or develop real estate. This creates a different risk and return profile, one that is focused on generating steady income from loan payments rather than waiting for property values to increase. For clients looking for real estate exposure without the volatility of the equity market, debt funds present a compelling alternative.
Common Misconceptions to Avoid
Real estate debt funds can be a powerful addition to an investment portfolio, but they’re often surrounded by myths that can cause confusion. When you’re exploring new investment avenues, it’s important to separate fact from fiction. Clearing up these common misunderstandings is the first step toward making a confident and informed decision that aligns with your financial goals. By looking past the noise, you can get a clearer picture of how these funds actually work and whether they fit into your strategy.
At Waterloo Capital, we believe in providing thoughtful investment solutions, which starts with clear, straightforward information. Let’s walk through some of the most persistent myths about real estate debt funds and set the record straight. Understanding these points will help you better evaluate the opportunities and risks involved.
Myth: They Require a Huge Initial Investment
A common belief is that you need a massive amount of capital to even consider investing in a real estate debt fund. This idea often discourages people from exploring what could be a suitable opportunity. While it’s true that some funds are structured for large institutional investors, many are designed to be accessible to a wider range of high-net-worth clients. The minimum investment amount can vary significantly from one fund to another. It’s always worth investigating the specific requirements of a fund that catches your interest rather than assuming it’s out of reach.
Myth: They’re Too Complex to Understand
The world of private credit and real estate financing can seem intimidating from the outside. Words like “mezzanine financing” and “senior debt” can make these funds feel overly complicated and unapproachable. However, the core concept is quite simple: the fund lends money to real estate developers and earns income from the interest paid on those loans. With the right guidance and clear resources, the mechanics of how these funds operate are perfectly understandable. A good fund manager will be transparent about their strategy and make it easy for you to see how your capital is being put to work.
Myth: High Returns Come with Low Risk
It’s tempting to see a fund advertising attractive returns and assume it’s an easy win. However, a fundamental principle of investing is that higher potential returns usually come with increased risk. Real estate debt funds are no exception. The risk level depends heavily on the fund’s strategy—for example, lending for a stable, occupied building is very different from funding a new construction project. It’s critical to look beyond the target return and understand the associated risks. Our research and insights often cover how to balance risk and return in today’s market.
Myth: All Debt Funds Are the Same
Thinking that all real estate debt funds operate identically is a significant oversimplification. In reality, they can vary widely. Some funds may focus exclusively on senior debt for residential properties in a specific region, while others might specialize in higher-yield bridge loans for commercial projects across the country. Each strategy comes with a unique risk and return profile. That’s why it’s so important to do your homework and understand the specific approach of any fund you consider. For financial professionals, this diligence is key to finding the right fit for their clients’ portfolios.
How to Evaluate a Real Estate Debt Fund
Choosing the right real estate debt fund comes down to doing your homework. It’s not just about potential returns; it’s about understanding the people, the plan, and the principles behind the fund. A thorough evaluation helps you look past marketing materials to see if an investment truly aligns with your financial goals and risk tolerance. By focusing on four key areas—the manager’s history, the investment strategy, the fees, and the approach to risk—you can make a more informed decision and build a complete picture before committing your capital.
Assess the Fund Manager’s Track Record
The fund manager is the pilot of your investment, so you want to be sure they’ve flown through storms before. A manager’s track record offers a window into their experience, decision-making, and resilience. Look for fund managers who have a proven history of using leverage successfully, even during tough market times. Ask about their performance during previous downturns, like the 2008 financial crisis or the market volatility of 2020. A long and consistent history, especially one that spans different economic cycles, speaks volumes about their ability to protect capital and identify opportunities when others can’t.
Analyze the Investment Strategy
Every fund has a unique playbook. Your job is to understand it and decide if it fits your goals. Does the fund focus on conservative senior debt, or does it take on more risk with mezzanine or construction loans? Most real estate debt funds issue senior secured loans, which can provide consistent, income-driven returns from interest payments. It’s also important to understand how a fund manager handles leverage throughout market cycles. A disciplined strategy that adapts to changing conditions is often a better indicator of long-term success than one that chases the highest possible yield at all costs.
Review the Fee Structure and Terms
Fees can quietly eat away at your returns if you’re not paying attention. Before you invest, make sure you have a crystal-clear understanding of the entire fee structure. This typically includes a management fee (a percentage of assets under management) and a performance or incentive fee (a share of the profits). Understanding the fee structure is crucial, as it directly impacts your net returns. Also, pay close attention to the fund’s terms, such as lock-up periods and redemption rights, which dictate how and when you can access your money.
Examine the Risk Management Approach
A fund manager’s approach to risk is just as important as their strategy for generating returns. How do they underwrite loans? What are their loan-to-value (LTV) targets? How diversified is the portfolio across different property types and geographic locations? A key part of this is their philosophy on leverage. While leverage can increase returns, it also adds risk. You want a manager who views debt as a tool to be used with discipline. The difference isn’t simply debt versus no debt; it’s about using disciplined, cash-flowing leverage versus poorly structured debt.
Key Metrics to Monitor
When you evaluate a real estate debt fund, you need to look beyond the surface-level promises of returns. The real story of a fund’s health and stability is told through its key performance indicators (KPIs). These metrics give you a clear picture of the fund’s underlying assets, risk exposure, and operational efficiency. By regularly monitoring these figures, you can better understand how your investment is performing and feel more confident in the fund manager’s strategy.
Net Asset Value (NAV) and Cash Flow
Think of Net Asset Value (NAV) as the fund’s core value. It’s calculated by taking the total value of all assets (the loans it has issued) and subtracting all liabilities (its own debts and expenses). A steady or growing NAV is a positive sign. But NAV is only part of the story. You also need to look at cash flow, which shows how much money the underlying properties are generating. Consistent, positive cash flow is crucial because it indicates the borrowers can make their loan payments, which in turn allows the fund to cover its expenses and make distributions to you, the investor. Strong cash flow management is a hallmark of a well-run fund.
Debt Service Coverage Ratio (DSCR)
The Debt Service Coverage Ratio (DSCR) is a vital health check for the loans within the fund’s portfolio. This metric measures whether a property is generating enough income to cover its debt payments. A DSCR greater than 1.0 means there’s more than enough cash flow to handle the mortgage, which is exactly what you want to see. A ratio below 1.0 is a red flag, suggesting a higher risk of default. Fund managers should be closely monitoring the DSCR of every loan they issue. As an investor, you should look for funds that maintain a portfolio with a strong average DSCR, as it points to a more secure and stable collection of underlying assets.
Loan-to-Value (LTV) Ratios
The Loan-to-Value (LTV) ratio helps you understand the risk associated with each loan. It compares the loan amount to the appraised value of the property it’s financing. A lower LTV is safer for the lender—in this case, the fund. For example, a 65% LTV means the property owner has 35% equity, creating a significant cushion if the property value declines. This equity stake makes it less likely the borrower will default. A fund that consistently originates loans with conservative LTV ratios is prioritizing capital preservation, which is a key consideration for any prudent investor.
Yield Spreads
Yield spreads are where the fund’s profitability comes into focus. The spread is the difference between the interest rate the fund charges borrowers and its own cost of financing or the return it targets for investors. A wider spread generally means higher potential profits for the fund and its investors. This metric is especially important to watch when interest rates are changing. A skilled fund manager can adjust their lending strategy to maintain healthy yield spreads, protecting the fund’s profitability even in a volatile market. It’s a direct reflection of the manager’s ability to source good deals and structure them effectively.
Is a Real Estate Debt Fund Right for You?
Deciding if a real estate debt fund fits into your strategy comes down to your financial goals, timeline, and comfort with risk. These funds aren’t a one-size-fits-all solution, but they offer compelling features for a range of investors. They can provide a steady income stream, act as a buffer against market swings, and offer a different risk-return profile compared to direct property ownership or real estate equity.
Whether you’re an individual investor looking to diversify or an institution seeking to capitalize on shifts in the lending market, understanding the specific advantages and considerations is the first step. Let’s look at how these funds can serve different types of investors and where they might fit within a broader portfolio.
Considerations for High-Net-Worth Individuals
If you’re looking for consistent cash flow without the volatility of the stock market, real estate debt funds are worth a look. At their core, these funds are pools of capital that lend money for commercial real estate projects, with the property itself acting as collateral. This structure provides a layer of security that you don’t get with many other investments. For individual investors, this means you can gain exposure to the real estate market with a focus on income generation. The appeal lies in their relative stability and downside protection, since your investment is backed by a tangible asset. It’s a way to participate in real estate’s potential while staying on the more conservative side of the risk spectrum.
Considerations for Institutional Investors
For institutional investors, the scale and direction of the market are key. As traditional banks have become more selective with their real estate lending, private debt has stepped in to fill the gap. In fact, private debt has become a major force, accounting for a significant portion of all capital raised for private real estate ventures. The growth is substantial, with the top 50 global firms capturing hundreds of billions in capital. This trend signals a durable shift in how real estate projects are financed, creating a wide field of opportunity for institutions. Investing in debt funds allows institutions to deploy large amounts of capital into a growing asset class that offers predictable, contract-based returns.
How to Fit Them in Your Portfolio
Think of a real estate debt fund as a portfolio diversifier that generates income. These funds often finance short-term needs like bridge loans, construction, and property acquisitions, filling a void left by traditional lenders. This positioning can make them less correlated with public markets. While they are generally considered lower risk than equity investments, they aren’t without risk—borrowers can default. However, fund managers often mitigate this by maintaining lower loan-to-value (LTV) ratios than banks, creating a protective cushion. For a portfolio, this can translate into a source of steady, income-driven returns that can help balance out more growth-oriented, higher-risk assets.
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Frequently Asked Questions
What’s the real difference between investing in a real estate debt fund and a REIT? Think of it this way: investing in a real estate debt fund makes you the lender, while investing in a REIT makes you a part-owner. With a debt fund, your returns come from the steady interest payments on loans made to property developers. With a REIT, your returns are tied to rental income and the property’s change in value. Debt funds are focused on generating predictable income, whereas REITs are more exposed to the ups and downs of the property market.
How is my investment protected if a real estate project fails? The primary protection comes from the property itself. Every loan a fund makes is secured by a tangible, physical asset. If a borrower defaults on their loan, the fund manager has the right to take control of the property to recover the invested capital. Experienced managers add another layer of security by lending at conservative loan-to-value ratios, which creates a financial cushion in case the property’s value declines.
Can I get my money out of a real estate debt fund whenever I want? Generally, no. These funds are not liquid investments like stocks or mutual funds. Because the fund’s capital is tied up in real estate loans that can last for several years, your investment will be subject to a lock-up period. This means you should be prepared to commit your capital for a set amount of time. Always review the fund’s specific terms to understand the timeline before you invest.
How do these funds perform when interest rates are going up? They can actually perform quite well in a rising-rate environment. Many of the loans issued by these funds have floating interest rates that are tied to a benchmark rate. When that benchmark rate increases, the interest rate on the loan adjusts upward. This means the fund can collect higher interest payments from borrowers, which in turn can lead to increased income for you as an investor.
If I only look at one thing when choosing a fund, what should it be? Focus on the fund manager’s track record. A manager’s experience, especially through different economic cycles, is the most critical factor. Look for a team that has a long history of managing risk, using leverage wisely, and protecting capital during market downturns. A great strategy is only as good as the person executing it, so their past performance is the best indicator of their skill.