The recent surge in private credit fund redemption requests should not have caught semiliquid fund managers off guard. The outflows they’ve seen are in line with normal retail mutual fund and exchange-traded fund investor behavior.
Retail flow patterns are remarkably consistent, and it would behoove semiliquid fund managers to manage their funds’ liquidity with them in mind. The more retail money they court, the more it becomes a matter of when, not if, a run of redemptions will hit their funds.
Making sure investors have clear and reasonable expectations about an investment strategy’s performance and time horizon is key to limiting outflows and avoiding sudden withdrawals. Such communication can fall by the wayside, however, when asset growth takes priority.
Acute Outflows Come for Everyone
Mutual funds and ETFs differ meaningfully from semiliquid funds. Investors can pull their money out of mutual funds or ETFs on at least a daily basis, while they can typically sell only quarterly in semiliquid funds and often only 5% of outstanding shares. Such limited liquidity is designed to prevent fire sales of hard-to-trade assets in the event of big redemptions. To private asset managers accustomed to providing zero periodic liquidity in traditional private vehicles, 5% quarterly redemptions may feel like a generous amount and one that should occur rarely.
That may have been true with institutional clients who, heretofore, have been private credit and equity managers’ primary clients, but the retail market they are now targeting is different. Nearly all (94%) actively managed mutual funds and ETFs experienced a 5% quarterly outflow at some point in their lives. In fact, the typical fund experiences 5% or more of quarterly net outflows nearly 20% of the time. Clearly, this is not a rare occurrence.
Handling a single quarter of 5% redemptions is not a huge concern for semiliquid funds. However, persistently high redemptions have created meaningful stress in these vehicles. So, a more relevant comparison is how frequently a whole year’s worth of redemptions (20%, or four quarters of 5%) occurs in mutual funds and ETFs.
A logical starting point is to track how often mutual funds and ETFs see steady 5% quarterly outflows, but that misses how their investors actually behave. When mutual fund and ETF investors decide to leave, they tend to exit all at once, not on an orderly basis once a quarter. A better stress test, then, is the share of funds that experience a 20% net redemption at any point over a 12-month period—what I’ll call “acute redemptions.”
In the case of actively managed mutual funds and ETFs (all semiliquid funds are actively managed, after all), it’s the vast majority of them. Roughly 80% of all funds with at least five years of operating history saw at least one 12-month period of 20% redemptions during their lifespan. And these are not one-off occurrences. The average fund that had at least one acute redemption also saw acute outflows in 18% of all quarters during its respective life.
Perhaps even more concerning, the categories most similar to semiliquid funds see some of the highest acute redemption rates. Private asset strategies typically get bucketed into investors’ alternatives allocation. Funds in Morningstar’s Alternative Strategies broad category group typically see the highest rates of acute redemptions—90% of all alternatives funds have experienced at least one 12-month period of 20% net outflows. Further, the typical alternatives fund was in acute outflows in 24% of its quarters. Alternatives allocations can often be where investors try their hands at tactical positioning. Semiliquid funds should absolutely not be used for such purposes, and trouble will certainly arise if they are.
Drilling even further down, the categories with the most frequent acute redemption periods are often the ones closest to typical semiliquid fund strategies. For instance, 97% of bank loan funds saw at least one period of acute redemptions, with the average fund experiencing them in 23% of quarters. Both bank loans and private credit offer floating-rate loan exposure and appeal to more aggressive yield-seeking investors. Likewise, private equity can be thought of as similar to small-cap equity investing, and small-cap funds typically see more acute outflows than large-cap funds.
Which categories see the lowest acute redemption rates? Target-date funds. You can see why private equity and credit managers want to get a foothold in those products. A lot of investors own them in 401(k) plans, which by their nature provide regular inflows and relatively infrequent outflows. Target-date outflows are often skewed upward due to retirement plan sponsors shifting out of the mutual fund versions and into collective investment trusts. So, in reality, these target-date acute outflow numbers are considerably lower. For example, in 2025, target-date mutual funds and ETFs saw $37 billion of net outflows, but Morningstar research found $54 billion of mutual fund to CIT transfers.
A Flood Is Coming
Semiliquid funds, particularly in private credit, have collected massive inflows in recent years. Funds like Blackstone Private Credit, Cliffwater Corporate Lending, and Blue Owl Credit Income have seen assets under management surge more than 2,000% or more in just the past five years. If these funds follow the typical pattern of high-inflow mutual funds and ETFs, expect a surge of redemption requests in the coming years.
Nearly 70% of active funds and ETFs with $100 million or more that grew 1,000% or more in a five-year span saw net outflows in the ensuing five years, with nearly 40% seeing their assets cut in half or more.
Semiliquid funds’ limited redemption policies will be able to stem short-term outflows, but over a horizon of five or more years, it can be hard for any fund that attracted hot money to keep that money from chasing the next hot fund. Private markets are not designed for tourists.
Client Alignment Mitigates Acute Outflows
The best way to minimize sharp outflows is to make sure clients have appropriate expectations so that they are not surprised by performance swings or bad news. Responsible mutual fund companies spend a lot of time and money trying to develop long-term relationships with advisors and RIAs because informed, loyal customers are less likely to quickly jump ship. Some of Morningstar’s highest rated Parents see the lowest frequency of acute redemptions. These firms are often less inclined to prioritize asset gathering than some of their peers.
For instance, only 28% of Capital Group’s funds saw at least one 20% redemption during their lives, almost a third of the industry’ 78% average. Advisors who use Capital Group are often quite loyal to it because the firm provides services that help them manage and grow their businesses beyond just investment products.
Similarly, Dimensional Fund Advisors once required advisors to attend educational seminars at their own expense before they could invest in the firm’s funds. DFA wants to ensure clients understand how the firm manages their strategies, how the funds tend to perform, and why it benefits everyone to stay invested for the long run. It is no surprise that DFA’s acute redemption numbers rank far below the industry average, and its numbers are likely overstated due to a recent surge in clients switching out of DFA’s mutual funds and into its ETFs.
Will the Semiliquid Wrapper Help or Hurt?
Perhaps semiliquid fund investors are more long-term-minded than the average mutual fund or ETF investor. The recent wave of private credit redemptions suggests that it is likely not the case. The bigger open question is how will retail investors respond to getting prorated. That is, when they do not get their full redemption amount because too many other investors also sought to redeem their shares.
On the one hand, the quarterly redemption offers could ease outflow pressures, as the lag could give investors enough time to cool off. On the other hand, it could exacerbate outflows. If investors expect to get prorated and expect others to ask for their money back, then it makes sense to try to redeem as many shares as possible. Investors may tender extra shares knowing some will be prorated, so the final amount redeemed matches what they really wanted. This, however, can effectively spur a bidding war on redemptions, ultimately creating an ever-tighter bottleneck.
Bottom Line: Proration Is Inevitable
Semiliquid fund managers and investors should not delude themselves into believing they’re immune from the flow patterns retail mutual funds and ETFs have experienced. The rise of ETFs shows investors want more liquidity, not less. Semiliquid fund managers are swimming against the current in mass-marketing vehicles with even less liquidity than mutual funds, a structure investors are fleeing. Putting those same investors into an even more restrictive structure is going to create inevitable logjams.
