Liquidity Considerations for Alts

Liquidity is a crucial concept when evaluating alternative assets. Liquidity refers to how quickly and easily you can convert an asset into cash without significantly affecting its price. In the world of investing, assets like stocks and bonds are considered highly liquid because you can usually sell them quickly on an exchange at a transparent price. However, many alternative assets are much less liquid.

Examples of illiquid assets include:

• Real estate properties;
• Private equity investments;
• Collectibles like art or classic cars;
• Some types of cryptocurrency tokens that do not have active markets.

When you invest in illiquid assets, you might face challenges if you need to access your money quickly. For instance, selling a rental property or a stake in a private business could take weeks, months, or even longer, and you might have to accept a lower price to sell quickly. This matters for investors because your ability to respond to new opportunities or unexpected expenses can be limited by how easily you can sell your assets. In addition, illiquid assets may have wider bid-ask spreads or require you to find specific buyers, both of which can impact the return you ultimately receive.

Imagine you own a share in a crowdfunded real estate project. If you suddenly need cash, you might not be able to sell your share right away or may have to accept a significant discount. This situation illustrates liquidity risk: the possibility that you cannot access your money when you want it, or you must accept unfavorable terms to do so. Understanding liquidity risk helps you decide how much of your portfolio to allocate to alternative assets and plan for the unexpected.