5 Risks of Semi-Liquid Alternative Funds

Semi-liquid funds have gained traction as asset managers expand access to private markets and investors look beyond traditional income strategies. The pitch is compelling: access, yield, alpha, diversification, partial liquidity. But these products come with risks and trade-offs that are easy to overlook. Here are five risks that deserve a closer look before allocating.

1. Liquidity is not guaranteed

   Redemption rights exist, but liquidity is conditional. Most semi-liquid funds limit redemptions to a small percentage of NAV per period. Should requests exceed the cap, redemptions are prorated or even suspended. This liquidity risk is particularly heightened In periods of market stress, when liquidity is most needed and underlying fund holdings can be difficult to sell without a steep discount.

2. Asset-liability mismatch potential

   By investing in less liquid assets while offering some liquidity, these structures introduce the risk of asset-liability mismatch, where the fund's obligations to meet investor redemptions (liabilities) do not align with the liquidity profile of its assets. The risk manifests when there’s a spike in redemption requests. Managers employ various strategies to mitigate asset-liability mismatch, such as holding a portion of assets in more liquid securities, maintaining lines of credit, or structuring redemption policies with caps, however, these measures are not foolproof.

3. Mark-to-model valuation

   Private assets in semi-liquid funds are not priced using observable market data. Valuations instead rely on models and periodic appraisals, which tend to lag current market conditions. This results in stale prices and artificially smooth returns that understate true volatility and correlation. Portfolio optimization models that rely on historical risk metrics may inappropriately overweight these funds as a result

4. Manager discretion and complexity

   Semi-liquid funds often combine broad mandates, which may include risky strategies, with structural flexibility. A fund manager may have significant discretion in portfolio construction, valuation inputs, and liquidity management. This can be additive when well-executed, but it introduces risk if manager incentives are not fully aligned with investor outcomes. Manager experience and expertise are therefore critical to success.

5. Embedded and opaque fees

   Fee structures are frequently layered and difficult to isolate. Beyond headline management fees, investors may be exposed to incentive fees, underlying vehicle expenses, transaction costs, and other indirect charges. Furthermore, when fees are calculated on NAVs that are insulated from public market volatility, investors may end up paying on marks that don’t reflect market reality.

Final Thought: Semi-liquid funds offer relatively simple access to private markets, but not without trade-offs. Liquidity is partial, pricing is imperfect, and complexity introduces operational and governance risks. These structures require careful diligence, conservative sizing, and a clear understanding of what you’re buying.