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A Closer Look at the Risks and Rewards of Semiliquid Funds
What advisors asked about semiliquid funds, and Morningstar strategist’s answers.
The semiliquid fund market has grown to roughly $600 billion—up approximately 40% since 2024—and many advisors are being asked about these products with increasing frequency. For many clients, semiliquid funds represent a first point of entry into private markets. That creates both an opportunity and a responsibility.
Our recent webinar, Insights From the State of Semiliquid Funds 2026, examined the market's growth drivers, cost structures, liquidity mechanics, performance challenges, and the emerging role of private markets in retirement plans. Here's a look at the questions that are top of mind for advisors navigating the growing market.
Q: How expensive are semiliquid funds, and are the disclosed fees telling the full story?
A: Semiliquid funds are significantly more expensive than traditional mutual funds or ETFs, and the fees investors see on a fact sheet are very likely understated.
Jack Shannon, Principal, Equity Strategies, explained that many semiliquid funds do not directly own the underlying assets. Instead, they own underlying funds, which means multiple layers of fees exist beneath the surface. Some of those layers, particularly incentive fees and acquired fund fees, are inconsistently disclosed or excluded entirely from stated expense ratios.
As Shannon noted during the webinar, "The sticker price here is still probably understated. And that means if you're buying one of these for the idea that you want to beat a public market, they have a high hurdle, because if it's 4% or 5% and it may be understated by 1 or 2%, these managers are going to have to deliver a lot of excess gross return in order to make you whole relative to public markets."
Q: How easy is it to get out of a semiliquid fund if a client needs liquidity?
A: In calm markets, it may be straightforward. In stressed markets, it is likely to be much harder than clients expect.
Jason Kephart, Senior Principal, Multi-Asset Strategies, described the core dynamic clearly: "Everyone kind of thinks they can get out faster than everyone else, but everyone tends to come to the same conclusion at the same time. And that's where it gets a little tricky."
The real estate sector offers a cautionary example. Starwood Real Estate suspended redemptions entirely. Bluerock, which had been structured as an interval fund, ultimately listed as a closed-end fund and saw its trading price fall from net asset value by approximately 40% in a single day.
Our position is straightforward: advisors should frame these products as effectively illiquid for most practical purposes. Clients who may need access to capital within a few years should think carefully before investing.
Q: What happens when semiliquid funds are introduced into 401(k) plans?
A: The challenge becomes even more complex. While private market access in retirement plans could expand diversification opportunities, retirement-plan vehicles require higher levels of liquidity and operational flexibility.
Our view is that firms entering the retirement market will likely need additional liquidity buffers to accommodate participant activity, including contributions, investment elections, and job changes.
As Kephart explained, collective investment trusts that invest in evergreen funds will likely maintain “their own additional liquidity sleeve on top of these evergreen funds” to support daily liquidity requirements. That additional liquidity may help investors access private markets within retirement plans, but it could also increase cash drag and reduce exposure to the underlying private assets.
Q: Why do fee disclosures remain a challenge in private markets?
A: Certain structures can exclude underlying fees from headline expense figures, making it harder for advisors and investors to determine total costs.
Shannon highlighted this issue, explaining that some operating-company structures mean managers “don't have to roll that fee up into your prospectus.” Morningstar continues to advocate for greater consistency and standardization in fee reporting so advisors can make more informed comparisons across the semiliquid fund universe.
Q: What benchmark should advisors use when evaluating private equity funds?
A: There is no perfect benchmark, but advisors should align the benchmark with the role the investment will play in the portfolio.
Private equity managers often argue that broad public benchmarks such as the S&P 500 are imperfect comparisons because their portfolios may resemble small-cap, value-oriented, or venture-style exposures. At the same time, investors frequently fund private equity allocations by reducing public equity exposure, making public benchmarks highly relevant.
Our view is that advisors should assess private equity funds against the specific public exposures they are replacing, while also considering higher fees, liquidity constraints, and cash drag. The Morningstar Medalist Rating for Semiliquid Funds can also serve as a valuable tool to determine suitability for portfolio inclusion.
Q: How should advisors evaluate evolving private market fund structures?
A: While innovation can expand investor access, advisors should pay close attention to transparency and disclosure standards. Different structures operate under different regulatory frameworks, resulting in varying levels of reporting and visibility.
One of the biggest challenges is that some structures provide significantly less portfolio transparency than registered funds. As Kephart noted, “The biggest challenge when you move away from things that are registered under the 1940 Act is you just have a lot less transparency.”
Our view is that transparency remains one of the most important due-diligence considerations when evaluating semiliquid funds and private market vehicles.
