Liquidity Premium Explained: Why Alternatives Pay Higher Returns

One of the biggest reasons HNIs allocate to AIFs and private credit is the liquidity premium — the additional return investors earn for committing capital that cannot be withdrawn instantly.

Listed markets offer daily liquidity, but that liquidity comes at a price: volatility, noise, and short-term behaviour. Alternatives, in contrast, lock capital for years. This lock-in allows fund managers to make patient, long-horizon decisions: negotiating better private deals, lending at higher secured yields, restructuring businesses, or acquiring undervalued assets.

Because capital is not rushing in and out, alternatives can capture inefficiencies inaccessible to public markets. That efficiency gap is what creates the liquidity premium.

For HNIs, understanding this concept is essential. Higher returns in alternatives are not magic — they are compensation for time and discipline.

Truvest Insight:

Liquidity is convenience. Illiquidity is opportunity.

Disclaimer:

Educational only. Not investment advice.