Behavior Beats Education

The recent tightening of withdrawal terms (known as "gating") at several semi-liquid funds has advisors fielding hard questions from clients. In this discussion, William (Bill) J. Kelly, CAIA®, founder of Educational Alpha, and Scott Welch, CIMA®, CEPA®, chief investment officer at Certuity, argue the problem isn't the products or the underwriting behind them. It's how they were sold and how investors were educated about what "semi-liquid" actually means. Kelly and Welch walk through where semi-liquid structures fit in a portfolio, as a convenience layer on top of long-term private allocations, not a substitute for genuine liquidity, why a 5-percent gating period still means a five-year wait for full access, and what advisors should be telling clients before they invest, not after headlines about gating make them nervous.

Key Takeaways

1. Kelly and Welch argue semi-liquid fund structures weren't mis-designed. They were mis-sold, with marketing that let investors assume "semi-liquid" meant readily accessible.
2. Even a fund with a 5-percent gating provision can mean a five-year wait before an investor's money is fully accessible.
3. Welch estimates a 70-to-80 percent portfolio allocation to semi-liquid assets could be defensible mathematically for some clients, but he wouldn't recommend it to most; illiquidity tolerance varies far more than the math suggests.
4. Both see semi-liquid vehicles as a convenience layer for long-term private-markets exposure, not the first place to look for liquidity when markets get volatile.