Investment Considerations in Illiquid Assets

Abstract

Alternative asset classes have varying degrees of tradability and structural liquidity. This article outlines illiquidity considerations as well as the pros and cons of investing in illiquid instruments and long dated trading strategies. Investing opportunity sets in inefficient market cycles tend to vary. Often, given market anomalies they come to reside for extended periods of time in less liquid instruments such as in distressed debt, private equity, certain types of loans, or in the securities of firms experiencing turnaround situations. These securities, because they are difficult to price, due to limited market participants, infrequent transactions, complex structures or highly uncertain future performance offer potential for excess returns over the risk free rate. Investors who have the ability to buy and hold these securities may thus stand to profit.