Liquidity Sleeve
A liquidity sleeve is a dedicated portion of a portfolio held in liquid assets to meet near-term cash needs and manage volatility.
Allocator relevance: A practical tool to fund capital calls, spending, and rebalancing without forcing illiquid sales.
Expanded Definition
Liquidity sleeves are built to provide flexible cash access during stressed periods. They may include cash, short-duration fixed income, or other liquid instruments depending on risk tolerance and objectives. The sleeve acts as the shock absorber for capital calls and drawdowns, supporting disciplined pacing into private markets.
The sleeve size is driven by obligations, redemption terms, and stress assumptions—not by a generic rule of thumb.
How It Works in Practice
Allocators set a target sleeve size, update it with the liquidity budget, and replenish it through distributions or rebalancing. They track whether the sleeve can cover a range of stress scenarios.
Decision Authority and Governance
Governance defines minimum sleeve thresholds and when exceptions are allowed. Without governance, the sleeve gets eroded during “good times,” increasing fragility.
Common Misconceptions
- A liquidity sleeve is just “cash sitting idle.”
- Sleeve size can be static.
- A sleeve eliminates the need for pacing discipline.
Key Takeaways
- Liquidity sleeves enable discipline in illiquid allocations.
- Size should be obligation-driven and stress-tested.
- Governance prevents sleeve erosion.