Why liquidity matters

Learn how the liquidity of different asset classes and fund structures impacts portfolio returns.

Why liquidity matters

Learn how the liquidity of different asset classes and fund structures impacts portfolio returns.

The cost of liquidity

In today’s uncertain environment, investors are seeking new ways to meet their goals. Understanding what liquidity is and how it can impact portfolio returns may help investors make more informed decisions.


The liquidity paradox

Understanding the liquidity spectrum

Liquidity is defined as the ease with which an investment can be bought or sold without significantly impacting the price of the security. Investments that can be easily bought or sold are said to be liquid while the inverse is true for illiquid investments.

How easily assets may be converted to cash can vary considerably. Traditional investments, including many stocks and U.S. Treasury bonds, can be easily bought and sold, so they are considered highly liquid.

Illiquid asset, such as private debt and private equity, classes typically have fewer buyers and sellers than more-liquid investments and tend to lack standardized terms, making it harder for investors to quickly analyze, value and, in turn, buy or sell them.

The asset class liquidity spectrum


Large-cap stocks

Mid-cap stocks

emerging market stocks

Preferred stock

Private equity real estate

Private equity venture capital

Fixed income

U.S. Treasuries

Investment grade corporate debt

High yield bonds

Emerging market debt

Structured products

Distressed debt

Private real estate debt

Private corporate debt

Equity Fixed income
Large-cap stocks U.S. Treasuries
Mid-cap stocks Investment grade corporate debt
Small-cap/emerging market stocks High yield bonds
Emerging market debt
Preferred stock Structured products
Distressed debt
Private equity real estate Private real estate debt
Private equity venture capital Private corporate debt

Review: What is liquidity?

Benefits of less-liquid investments

Investors tend to gravitate toward more-liquid investments. But in today’s environment, a portfolio of all-liquid investments may not help them reach their long-term goals.

Combining liquid and less-liquid investments may help investors meet the following objectives:

  • Potential to generate a return or yield premium. Investors typically demand a higher rate of return in exchange for giving up liquidity. This “illiquidity premium” is often a key factor for those investing in less-liquid and illiquid investments.
  • Diversify a portfolio by adding low-correlated assets. Finding low-correlated assets, or assets that do not move in relation to one another, is key to building diversified portfolios. Less-liquid and illiquid investments have historically exhibited lower correlation to traditional investments.
  • May improve risk-adjusted returns. Institutions have long turned to less-liquid and illiquid investments to help smooth the returns of their portfolios to drive long-term performance by reducing the impact of volatility on the portfolio.

Review: Why consider less-liquid and illiquid investments?

Incorporating less-liquid and illiquid assets into an investor portfolio

Investing through the right fund type, or structure, is critical when investing in less-liquid and illiquid assets or strategies that require a long-term investment horizon. Accessing and maximizing the return and diversification potential of less-liquid and illiquid investments takes a thoughtful approach to matching the liquidity of the asset class, management style and investment structure. A mismatch between the liquidity of assets and fund structure may limit a fund’s return potential or subject investors to unnecessary risks.

The fund structure liquidity spectrum

Review: Accessing less-liquid and illiquid investments

Investor considerations

Investing in less-liquid and illiquid assets is different than investing in traditional investments, such as stocks and bonds, and involves risk in addition to the normal risks associated with investing, including the risk that a shareholder may receive little or no return on their investment or that a shareholder may lose part or all of their investment. Less-liquid assets are suitable only for investors who can bear the risks associated with limited liquidity and should be viewed as a long-term investment.

Learn more

Dig deeper on the topic of liquidity to understand how to effectively match asset class and fund structures.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.


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