CAIA Blog (AllAboutAlpha)

No Exit, No Problem? How Asset Owners Can Tame Illiquidity Risk

The share of private‑debt, infrastructure and other illiquid alternatives has surged among institutional and wealth‑management portfolios, driven by regulatory changes and the search for higher risk‑adjusted returns. However, the absence of deep secondary markets and stale pricing creates cash‑flow uncertainty, model risk, and the denominator effect, complicating asset‑liability‑management. The authors outline practical mitigations, including liquidity penalties, stress‑testing, proxy correlations, and disciplined manager selection. An illustrative €1 bn case shows how timing mismatches can push illiquid allocations off‑target, underscoring the need for proactive liquidity planning.