Investment management is not just a job, its a craft. Practitioners of the craft are not just motivated by money but also by the autonomy they are afforded. You cannot influence the manager with carrot or stick. You might appeal to their professional respect as a fellow craft. Impose your will and they will either flee or they become sycophants.
Semi liquid funds have become a bit of a thing in the past few years. They serve a purpose.
There are some drawbacks:
There are more serious complications and risks:
Semi liquid funds have grown in AUM from circa US$120 billion in 2020 to over US$600 billion in 2025. There is an interesting dynamic at the heart of this phenomenon. Before 2022, LPs reinvested fund distributions in subsequent funds allowing GPs to purchase more new businesses in a positive feedback cycle. As interest rates surged in 2022, M&A froze and exits fell 60% from their 2021 peak. LPs weren’t getting cash back and therefore reduced their commitments to follow on funds. Institutional LPs capacity to allocate became seriously impaired. For GPs, a new source of capital had to be found: private wealth investors. These investors, however, differ from insitutional LPs in that they require liquidity or the illusion thereof. Enter the semi liquid, perpetual fund.
To invest in semi liquid funds, the investor has to avoid being too precise about the entry and exit valuations at the redemption dates. The investor has to accept that often liquidity is being provided by new investors buying into the fund. There is a technical term for this type of scheme, beginning with the letter ‘P’. Investors must have a short memory not extending before 2008 when an entire cohort of liquid funds were found to have hoarded up private credit (they are not that new after all), or private equity, and had to gate or suspend redemptions (thus a semi solid fund?).
The liberal democratic, free market economy has generated significant wealth for the world. However, it also appears to tend toward an unequal distribution of that wealth. One plausible reason lies in the unequal scalability of inputs to production. Labour is weakly scalable, capital more so, and intellectual capital close to limitlessly scalable. Ownership of capital and intellectual capital, combined with the ability to bequeath such assets across generations, concentrates claims on future income and increases inequality over time.
Inequality beyond a certain threshold is undesirable, if not on social justice grounds, then on efficiency grounds. It unevenly weights the consumption and allocative votes of economic agents, leading to less than optimal outcomes. It also blunts economic analysis and policy formulation. Many economic models implicitly assume a zero Gini world by treating agents as identical, which is analytically convenient but descriptively false. In reality, inequality leads to over saving, as marginal propensities to consume decline with wealth. Over saving depresses the cost of capital and inflates the value of assets relative to labour, reinforcing the underlying dynamic. This helps explain why capital can feel abundant and scarce at the same time.
The purpose of financial capital, hereafter simply capital, is to finance economic activity, whether consumption or investment. What, then, is the purpose of impact capital? The distinction can only arise if impact capital funds things that broad or conventional capital will not fund. Since funding is only relevant to activities that people or societies want, impact investing may be sharpened to: funding things people want but do not want to fund.
Why might people not want to fund something they nonetheless want? The simplest answer is that they do not expect to obtain a reasonable return on conventional terms. This may be because the good in question is a public good. Everyone wants it, but no one will pay for it. Once supplied, no one can be excluded from consuming it, and consumption does not exhaust it. Someone else is therefore always expected to pay, which in practice often means no one does.
Alternatively, the activity may be privately supplied but subject to extreme uncertainty. Expected returns may be high, but the range of outcomes may be wide, or the time to exit long and indeterminate. Such projects fall outside the risk tolerance or time horizons of conventional capital, even if their social value is large. Early stage climate technologies provide a familiar example. Many promise enormous long term social benefits, but face uncertain regulatory environments, long development cycles, and unclear exit paths. As a result, they are often starved of capital precisely when additional investment would matter most.
Impact capital, then, exists to resolve capital allocation failures. If a project would have been funded anyway, at scale, on similar terms, without impact capital, then impact capital is not needed. High return, easily funded projects fail several tests of impact. Capital is not scarce, risk is not mispriced, and time horizons are acceptable. In such cases, impact capital has little or no marginal value. Its use crowds out conventional capital, risks subsidising returns that do not require subsidy, and misallocates scarce impact capacity. This is where much of what passes for impact investing goes wrong.
The contribution of impact capital can be understood in terms of an efficient frontier. Conventional capital operates along a frontier that maximises financial return for a given level of risk. Impact capital is justified only where it shifts that frontier, where, for a given level of financial return, it produces greater social value, or where, for a given level of social value, it accepts lower returns, greater uncertainty, or longer duration. Impact is therefore not defined by intent alone, but by the extent to which capital is deployed beyond what markets would otherwise provide.
Why should impact capital fund public goods and risky endeavours in particular? Risk aversion declines as wealth increases. An individual’s first million is risk averse, the next ten million less so, the next hundred million less still. Those with surplus capital possess a greater capacity to absorb volatility, illiquidity, delayed payoffs, and partial failure. If progressive tax systems are justified in part by diminishing marginal utility of wealth, a parallel justification exists for progressive risk bearing. Those with greater wealth are less harmed by failure and uniquely positioned to fund projects whose benefits are diffuse, long dated, or imperfectly captured by private returns. Put more bluntly, they can afford to be patient or bear losses when others cannot.
Impact capital should therefore be understood not as a substitute for conventional capital, nor as a moral overlay on profitable investing, but as a complement. It is capital deployed where markets systematically underprovide, and withdrawn as markets mature. Its purpose is not to maximise returns with a conscience, but to expand the set in which socially valuable activity can occur.
Geopolitics:
A belligerent US is a serious complication to the outlook. The objectives of the Trump administration are a bit unclear as their economic and social aims may not be compatible with current international norms. Conquest for the sake of conquest is a risk we have to entertain. Europe is in the crosshairs and much uncertainty surrounds its response and how the US might respond. Russia and China have been silent thus far, pursuing their own territorial agendas, but this might change and could compound the complexity.
Domestic US politics will come into focus quickly as the composition of Congress will have implications for the Trump agenda. Mid terms happen end of this year. Already there is a creeping sense of domestic oppression in the US and this could escalate. The White House needs domestic support for its international expansionist agenda and quite how it achieves this will be interesting.
Economics:
An equally important concern is sovereign debt levels. While tariffs may have improved the US fiscal position in 2025, deficits are expected to increase steadily from 2028 – 2035. Pensions, welfare, healthcare and defence requirements are likely to pressure budgets in most major economies across the world.
Fiscal spending may be constrained by borrowing costs. Monetary policy may be constrained by inflation. On current general conditions, central banks can be expected at some stage to resume buying government bonds, unless inflation rises significantly above target.
Markets and investment strategy:
Asset values can be supported if fiscal and monetary policy are coordinated in accommodation mode. If nothing interrupts fiscal expansion and monetary accommodation, asset valuations may rest at a new, higher, mean. If not, then expected returns must decline. The threats to fiscal indiscipline or debt monetization will be rising inflation, interest rates and exchange rate volatility.
Markets are in a state of constant uncertainty, however, current levels of uncertainty are acute. Market risk is high and return per unit risk is poor. Liquidity risk is high given that flexibility is valuable, thus liquidity premia per unit risk is also poor. Complexity risk, which is assumed when investing in many alternative investments like relative value and arbitrage strategies is high given that historical relationships may become dislocated.
Valuable qualities in any portfolio and strategy include stability of capital, liquidity, simplicity and flexibility. All things being equal, in credit, seek to be in liquid markets and senior in claim. In equities, balance between value and growth and avoid over allocation to any particular country or sector. Market cap weighted index ETFs are poorly diversified and should be de-emphasised. Seek a globally diversified, equally weighted equity portfolio to express the equity view.
Generally, in an asset repricing, crystallise losses and increase risk. Sell senior buy sub. Sell value buy growth. Sell liquid buy less liquid. This will require discipline and preparation since it will involve acting against most human emotional instincts. Asset classes need to be identified buy and sell levels identified.
Scenarios coming out of uncertainty should be built to guide the investment strategy post repricing.
Some background.
Notwithstanding our rhythms being regulated by the circuit of our planet around its star…
It has been a little over fifteen years since societies began to accept that win–win equilibria are not always attainable, and that reality more often resembles a constant-sum game. Four decades of credit-fuelled, leveraged growth came to an abrupt end in 2008. What followed was a shift in priorities: a quest for efficiency gave way to a quest for resilience.
Despite unprecedented monetary easing, real economic growth remained subdued while asset values surged. The resulting divergence intensified inequality, breeding dissatisfaction and resentment, and creating fertile ground for populism. Today’s malaise, therefore, is neither sudden nor novel but has roots extending back more than a decade. Quantitative easing, it seems, carries long-range and long-term consequences that its architects did not fully anticipate at the time of implementation.
Monetary policy alone, however, is not inherently inflationary; if anything, it can be wage-disinflationary. The COVID years forced governments to deploy large-scale fiscal expansion and, in doing so, revealed that the short-term side effects were less severe than previously theorized. The consequence has been a growing reliance on fiscal policy, with national debt levels expanding to historically alarming magnitudes. When monetary and fiscal policy are engaged simultaneously, they form a powerful engine for growth, with the costs merely deferred, not eliminated.
Addressing the accumulation of national debt will require a multi-pronged approach. First, debt burdens can be moderated through inflation. Provided inflation does not become unanchored or provoke a political backlash, inflating debt away remains an effective tool. Second, interest rates must be contained. Short-term rates lie largely within the control of central banks through repo and deposit facilities, but excessively loose policy risks reigniting inflation and increasing the term premium. Longer-term financing of fiscal deficits may therefore require central bank support.
The side effects of such strategies are likely to appear in the form of weakened purchasing power, either domestically or externally. The external impact (the exchange rate), in particular, will depend not on any single nation’s choices, but on how those choices compare with the strategies adopted by others.
Macroeconomics and Asset Allocation
For an investor whose objective is to smooth volatility in order to provide a stable funding source, and whose portfolio emphasises skill-based, idiosyncratic, non-market risk strategies, it is reasonable to ask why the macroeconomic environment should matter at all.
The answer lies in the practical realities of investing. Asset allocation remains the single most important determinant of long-term investment outcomes. One may identify the next Nvidia, but how much capital can prudently be allocated to a single name. History offers a sobering reminder: in the year 2000, that same argument might have been made for Nokia or Ericsson. Responsible diversification requires reasonable single name exposure limits, and even sector-level concentration needs constraints.
Thus the decisions that matter most are not individual security selections but allocations across broad asset classes: equities, credit, real estate, infrastructure and digital assets. Asset allocation, in turn, requires an explicit or implicit view on the evolution of the global economy, social dynamics, and geopolitics.
Countries and Regions
It is easy to fall back on crude generalisations: that the US leads in technology, that Europe is stifled by regulation, that China is constrained by central planning, and that emerging markets are profligate serial defaulters. Look closer and discover that China, for example, is advancing rapidly—and in some areas arguably leading—in applied AI, robotics, nanotechnology, biotechnology, and green industrial technologies. At the same time, emerging-market sovereign balance sheets have improved meaningfully over the past decade, while debt levels in many developed economies have risen sharply.
Country allocation therefore demands a broader analytical framework, incorporating innovation capacity, policy and regulatory direction, credit conditions, and critically, exchange rates. For the asset allocator, interest rates and foreign exchange dynamics carry particular weight.
Since the Bretton Woods system was established, and even after the suspension of the gold standard, the US dollar has functioned as the world’s anchor fiat currency. The creation of the euro and the rise of the renminbi have eroded some of this exorbitant privilege, but the USD remains the dominant reserve and trading currency globally. Current US political dynamics pose a potential threat to this status and may accelerate its relative decline. Yet decline in what sense? As US exceptionalism weakens, the dollar may not necessarily depreciate outright; rather, it may become more responsive to underlying economic conditions, arguably making it more analytically tractable.
The outlook for interest rates is similarly unsettled. The current global framework departs from traditional theory under the combined pressures of prolonged quantitative easing and the increasing politicisation of central banking.
Why Macro Still Matters
It is tempting to believe that a sufficiently clever, idiosyncratic investment approach can insulate portfolios from macroeconomic forces. In practice, bottom-up or fundamentally driven strategies that ignore the macro environment risk accumulating unintended factor exposures. Awareness of macro risk is therefore indispensable, even when forecasts are uncertain and noisy.
Macro forces frequently exert influence at the micro level. Political pressure on the Federal Reserve can raise term premia and funding costs; higher discount rates compress asset values; slower growth introduces redistributive effects that distort relative-value relationships. Policy decisions matter as well: the effective dilution of the Inflation Reduction Act has reduced the attractiveness of renewable energy investment in the US; relaxed bank capital requirements can lift equity valuations independently of net interest margins; FTC and CFIUS interventions can derail otherwise sound mergers; and leadership changes at the FHFA can materially affect the mortgage-bond market.
Macroeconomics may not dictate individual outcomes, but it shapes the environment in which all investment decisions are made. Ignoring it does not eliminate its influence—it merely obscures the risks it introduces. Thus…
Ten Seconds Into the Future
Most countries are likely to continue running significant budget deficits. As long as few break from this approach, the relative pricing of sovereign risk should remain broadly stationary. Central banks will likely be required to help contain sovereign borrowing costs by purchasing their own governments’ bonds. This remains feasible provided inflation does not spiral out of control. Moderate inflation above target is likely not only tolerable but may be desirable, as it reduces the real debt burden. Together, accommodative fiscal and monetary policy support output and liquidity. Depending on economic slack and the pace of security issuance, they may also be inflationary across goods, services and assets. With labour supply constrained by demographics and immigration policy, wage pressures are likely to build and absent a meaningful improvement in productivity, inflationary forces will intensify.
Geopolitical considerations further complicate the outlook. Over the past decade, governments and corporations have reshored supply chains along political alignments, prioritising robustness over efficiency. This carries commercial costs, likely social costs, and potentially geopolitical ones as well. These dynamics create a loose but reinforcing feedback loop, shaping policy, investment and trade decisions.
Artificial intelligence may offer a partial offset by lifting productivity and alleviating cost pressures. To date, much investment has focused on achieving increasingly advanced forms of intelligence, whereas substantial productivity gains could be realised by deploying existing capabilities across industrial and commercial applications. Manufacturing has already experienced steady efficiency gains and disinflation through offshoring, automation and robotics, while services have remained relatively untouched. AI has the potential to bring similar efficiency improvements to services, expanding economic capacity and creating slack. Such slack would ease inflation constraints and extend the runway for accommodative fiscal and monetary policy.
Asset valuations reflect successive waves of monetary and fiscal accommodation and remain elevated. Even with strong nominal growth potential, high starting valuations compress expected returns. Low interest rates, especially if they rise from current levels, pose a further risk to valuations. The return per unit of market risk is therefore likely to be lower than in the past.
For investors, this implies that maintaining or increasing returns will require assuming alternative sources of risk.
Hedge funds offer one avenue. Equity dispersion has increased and can be exploited by equity long short strategies, with similar opportunities in credit. Capital structure arbitrage is driven primarily by idiosyncratic factors and is less sensitive to macro conditions. Convertible arbitrage spans a range of risks, including equity volatility, capital structure dynamics, credit beta and special situations. Merger arbitrage appears to embed long equity exposure but depends heavily on deal flow, which may be constrained by higher interest rates. Macro strategies are more challenging, as short term policy and economic developments are difficult to forecast and can produce unpredictable outcomes. Complexity premia may also be harvested, though complexity risk often overlaps with market and liquidity risk and is difficult to identify and manage. Liquidity premia, particularly in private markets, are hard to quantify, complicating assessments of whether compensation is adequate. The growth of evergreen and semi liquid private market vehicles appears more a source of risk than opportunity, effectively placing illiquid assets within liquid structures.
Flexibility therefore has value. When uncertainty is low, committing capital to long gestation strategies is less costly. At points of inflection, when uncertainty is elevated, the ability to adjust course becomes critical. Investors should maintain sufficient liquidity, whether through ownership of liquid assets, access to committed credit lines, or reliable cash flows from operating businesses or income generating assets.