Liquidity Mismatch
Liquidity mismatch occurs when investor redemption rights are faster than the fund’s ability to sell or realize underlying assets.
Definition
Definition Liquidity mismatch is the structural risk that a fund offers withdrawals on a schedule that is not supported by the liquidity of its holdings. In benign markets, mismatch can appear manageable. In stress, it becomes visible through gates, side pockets, valuation uncertainty, and redemption queues. Allocator Context Allocators evaluate liquidity mismatch by comparing redemption terms, asset liquidity profiles, settlement times, and stress assumptions. They also assess whether the fund’s liquidity management policies are conservative, and whether the manager has demonstrated discipline in not stretching liquidity claims to attract capital. Decision Authority Liquidity mismatch is often a hard constraint embedded in IPS rules and risk limits. Strategies with meaningful mismatch may require higher-level approval, lower sizing, or may be excluded from certain sleeves entirely. Why It Matters for Fundraising Many fundraising failures are liquidity failures in disguise. If LPs discover mismatch late, legal and IC processes slow down. Managers that are explicit about liquidity realities and protect investors through conservative terms build durable trust. Key Takeaways Becomes most dangerous during market stress Drives gates, queues, side pockets, and reputational damage Often policy-constrained for institutions Conservative liquidity framing improves fundraising outcomes