A semiliquid fund may align with an investor’s objectives, but not everyone is equipped to invest in private, illiquid assets. Investors should carefully consider some additional factors before adding a semiliquid fund to a portfolio.
Successful investing in private assets depends on meeting three key preconditions, or “P’s”: patience, premium, and proficiency.
Patience: A Long Horizon and the Capacity to Bear Risk
Maintaining a long-term investment horizon is the name of the game in private assets. These securities trade far less frequently than in public markets, and this unreliable liquidity can put investors looking for a quick exit in a crunch.
Investors should thus only consider semiliquid funds if they have a long investment horizon of at least seven to 10 years. By design, semiliquid fund structures provide limited liquidity windows to get in or out of the fund. Redemptions are often only offered quarterly and limited to up to 5% of the fund’s value. This means that investors should only consider investing capital in semiliquid vehicles that they are comfortable having locked up for years at a time.
But a patient mindset is a powerful advantage in financial markets—both private and public. Access to long-term capital enables investors to look past short-term noise and invest with a longer time horizon than the market. Morningstar’s Mind the Gap study regularly concludes that investors can be their own worst enemies because of poor timing decisions, such as buying a hot fund after a strong run at its peak or selling a loser at the worst possible moment before a strong rebound.
The 2025 study found that the more investors transacted, the wider the gaps between investor returns and total returns grew. The chart below shows how the investor return gaps evolved across “cash flow volatility” quintiles, which group funds based on investors’ trading activity (flows in and out of funds). The “gap” represents the portion of funds’ total returns forgone because of the timing and magnitude of transactions investors made over a period.
The inability to transact can represent a behavioral safeguard for the more trigger-happy investors. The virtue of patience applies to public markets, too, but it ultimately hinges not just on the investors’ willingness to stay invested, but also on their capacity to bear risks over long time frames.
Premium: Private Assets Need to Deliver Higher Returns
Investors should demand an increased return for giving up liquidity and dealing with the complexities of private assets investing; otherwise, what’s the point? Without superior returns, semiliquid funds are not worth the additional hassle.
Requiring additional compensation for the risks borne makes sense in theory, and the literature on the so-called illiquidity premium is vast. Historical data suggests a premium can exist at times, but, like all investment premiums, it can ebb and flow in different market conditions. Additionally, skeptics point out that the premium is at least in part explained by the typical characteristics of the market, such as leverage, sector, and size.
Sometimes, the premium is more an illusion than an asset class trait, reflecting a feature of the vehicle rather than evidence of skill or premium. Private credit semiliquid funds in the US have delivered superior returns over funds investing in broadly syndicated bank loans, for example, but this is mainly an effect of leverage, as we show in our State of Semiliquid Funds report.
While many market participants tout the benefits of adding private markets to a portfolio, the illiquidity premium is not guaranteed, and the high fees charged by semiliquid funds require substantial premiums to deliver net returns in excess of public markets. Investors need to balance the allure of a superior but nonetheless highly uncertain outcome with the challenging realities of private market investments, such as their complexities, costs, lower transparency, and illiquidity.
Proficiency: Fund Selection Is Key
The last ingredient is fund selection; in other words, the proficiency or skill required to navigate private markets and semiliquid funds. There is no such thing as low-cost, passive exposure to private markets. Unlike traditional markets, there is no standardized benchmark or “beta” strategy to lean on, making fund selection a decisive and inescapable factor for success.
Private assets are notoriously expensive to access, and there is a wide dispersion of returns across strategies, especially in private equity, reflecting both the potential payoffs and the penalties of manager selection. The implication is that strong selection capabilities are a requirement, not an option.
This realization highlights an important decision that is intertwined with portfolio construction: whether to pursue targeted, niche strategies that can be combined, or opt for a single, multi-asset diversified solution. For most investors, a broadly diversified approach is likely more practical.
Ultimately, investing in semiliquid funds isn’t for everyone. By carefully considering how patient they can afford to be, how much of a premium they desire, and where they have the proficiency to select the right funds, investors can better position themselves for success.
Once investors figure out why semiliquid funds can help them meet their investment objectives and what it takes to succeed in this space, the next step is to explore how they fit into a portfolio.
