alternative investments

3 Differences Between Liquid and Illiquid Alternative Investments

alternative investments

The world of alternative investing represents opportunities for investors to enhance their portfolios by including assets that have the potential of generating non-correlated returns. However, investors often face the difficult question of comparing liquid and illiquid investment opportunities. Both have unique characteristics (beyond the differences in liquidity) that represent distinct opportunities as well as risk profiles. Here are some differences between the two.

1. Liquidity Spectrum

As the names suggest, liquid and illiquid alternative investments are often characterized by their underlying abilities to be exchanged or sold in return for cash. While this spectrum is most certainly shifting the development of secondary markets, investors are still faced with a hard-pressed decision of whether or not to include assets that are difficult to offload. The most liquid alternatives may include alternative ETFs or ’40 Act funds that have differentiated strategies, but can also be sold on the open market fairly easily. The other end of the spectrum includes investments such as private equity, hedge funds, art and potentially even wine! These assets can have extensive lockup periods and prevent investors from redeeming their money on a regular basis. Investors need to seriously consider their ability to withstand potential economic downturns or the future need to liquidate investments during rainy days.


2. Costs

Both liquid and illiquid alternatives have cost structures, but these may differ based on the type of investment and how they are sourced. Many liquid alternatives are structured financial products, whereby intermediaries create regulated products which can be sold to unaccredited and accredited investor alike. These have layers of fees that serve to compensate the intermediary or financial institution for creating and maintaining the liquid alternative. On the flip side, many illiquid alternatives can be directly sourced, reducing the fees associated with intermediaries. Platforms like DarcMatter are able to provide direct access to venture capital funds, hedge funds and even private companies without the cost stack associated with liquid alternatives.


SEE ALSO: Will Liquid Alternatives Last?


3. Investment Requirements

One of the most important requirements with regards to liquid and illiquid alternatives is the nature of the underlying regulations that govern them. Many illiquid alternatives are offered under various securities exemptions that keep them free from heavy and burdensome oversight by the government. However, in exchange, there are various restrictions with regards to the number and type of investors as well as the manner in which investors are engaged. Most illiquid alternatives that are offered in the form of securities are restricted to accredited investors. Correspondingly the minimum investment amounts for these types of investments tend to be much higher than liquid alternatives that can be offered to unaccredited investors.

All investments require significant amount of due diligence and consideration, but before diving into alternative investments, it’s important to consider the various differences that exist between liquid and illiquid alternatives. Many of the benefits that are provided by alternatives, such as return premiums and non-correlation, are closely tied to illiquidity. As such, these favorable characteristics are often lost or dampened within liquid alternatives and can be swayed by market dynamics.



DarcMatter is a technology platform providing enhanced capital connectivity between issuers and investors in the alternative investment space. Visit DarcMatter to start raising capital or get transparent access to alternative investment opportunities.

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