Liquidity
Liquidity is the ability to convert an asset into cash quickly with limited price impact.
Allocator relevance: A core portfolio constraint—liquidity determines whether an allocator can meet spending needs, capital calls, and redemptions during stress.
Expanded Definition
Liquidity is not binary. It depends on market depth, transaction costs, lockups, redemption terms, and stress conditions. In private markets, liquidity is often constrained structurally (lockups, capital calls, secondary market frictions). Even in public markets, liquidity can vanish during volatility spikes.
Allocators manage liquidity at the portfolio level using liquidity budgets, sleeves, pacing models, and stress tests for correlated drawdowns plus capital calls.
How It Works in Practice
Teams classify assets by expected liquidity, model cash needs, and set minimum liquid buffers. They evaluate fund terms (gates, lockups) and track redemption queues if applicable.
Decision Authority and Governance
Governance sets liquidity risk limits and escalation rules. Weak governance leads to overcommitment and forced selling at the worst time.
Common Misconceptions
- A redemption feature guarantees liquidity.
- Private assets are illiquid but “safe” because marks are smooth.
- Liquidity is only about asset class, not structure.
Key Takeaways
- Liquidity is a portfolio survival constraint.
- Stress regimes change what “liquid” means.
- Liquidity planning must include capital call timing and gates.