Liquidity Mismatch
Liquidity mismatch occurs when the liquidity terms of a portfolio’s assets don’t align with the timing of its cash obligations.
Allocator relevance: A common failure mode in illiquid-heavy portfolios—mismatches surface during stress and can force bad decisions.
Expanded Definition
Mismatch is structural: long lockups and slow distributions paired with near-term cash needs (spending, redemptions, capital calls). It often becomes visible when markets fall and distributions slow at the same time obligations remain. Semi-liquid products can also create mismatch if redemption terms are more generous than underlying asset liquidity, leading to gates and queues.
Allocators manage mismatch via liquidity sleeves, pacing, and limits on illiquid exposure.
How It Works in Practice
Teams model obligations and expected liquidity of each sleeve, then stress test for delayed distributions and accelerated calls. They monitor redemption queues and gate risks in vehicles offering periodic liquidity.
Decision Authority and Governance
Governance sets maximum illiquid exposure and overcommitment rules. It also defines what happens when mismatch risk rises (de-risking, slowing commitments, secondary sales).
Common Misconceptions
- Mismatch is only a problem for endowments and pensions.
- Smooth private marks mean liquidity risk is low.
- Gates solve mismatch (they manage symptoms, not root causes).
Key Takeaways
- Mismatch is about timing, not just asset type.
- It becomes worst when you need liquidity most.
- Governance and pacing reduce mismatch risk.