Semiliquid funds may not deliver the diversification investors expect, while their illiquidity premiums are uncertain, Morningstar has warned.
A study by Morningstar examined the role of semiliquid funds in portfolios, noting that these vehicles are often sold as providing higher returns, diversification benefits and broader access to private markets.
However, the study found that, contrary to these claims, semiliquid strategies often carry traditional equity or credit risks and are not suitable as portfolio diversifiers. Most semiliquid funds should be seen as expanding the equity or credit opportunity set rather than introducing new risk factors.
The report also cautioned that the illiquidity premium offered by some of these funds can be illusory, reflecting the fund’s structure rather than evidence of skill or a genuine premium. Overall, it warned that the illiquidity premium is not guaranteed.
Read more: “Excessive use” of SRTs show bank weaknesses, Morningstar DBRS warns
When a fund offers more liquidity than its holdings can support, stress can emerge quickly in volatile markets, Morningstar said. Their structure can also make portfolio adjustments and rebalancing more challenging.
“Semiliquid funds promise easier access to private markets, but deploying them in a diversified portfolio presents its own challenges,” said Francesco Paganelli, principal of manager research at Morningstar. “Semiliquid funds aren’t magic diversifiers, and most should be seen as expanding the equity or credit opportunity set, rather than adding new risk factors.”
To genuinely reap the benefits of semiliquid funds, investors need three things: patience and a long-term mindset, a return premium to compensate for complexity and illiquidity and proficiency in selecting the right managers, Morningstar said.
Read more: Private markets face “reality check” as fundraising declines in 2025
Manager selection is critical, Morningstar added, as return dispersion in private markets is wide, making due diligence a key driver of outcomes.
Paganelli added: “To genuinely reap their benefits, investors need patience, a return premium to compensate for their illiquidity and complexity, and skilled manager selection. Success depends on setting realistic expectations and sizing allocations carefully. Moreover, vehicle structure matters as much as choosing the right strategy.”
Read more: Japan set to attract private credit investors in 2026
