Liquid, illiquid, and alternative assets: a primer

Genevieve Signoret

Letter from Queretaro

Yesterday I wrote, “In this blog entry, I update you on our current (liquid) portfolio strategies.” A few paragraphs below that I mentioned as an example of risk assets something called “alternative assets”. In this blog entry, I want to spell out what I mean by liquid assets, illiquid assets, and alternative assets.

Two caveats first. (1) Usage in our industry can vary. This clarification pertains to our usage at TransEconomics. (2) This is a non-technical piece; I simplify on purpose.

We refer to the liquidity of an asset as the speed with which you can turn it into cash (at a reasonable valuation, of course—I could turn my house into cash today if I charged only a dollar for it, but that’s not what we mean).

A liquid asset we might propose for your portfolio strategy is one listed on an exchange for which the volume of transactions each day there is a high enough that we can buy or sell the asset quickly. Examples are stocks, bonds, real estate securities such as REITs, derivatives (including those linked to commodities), and exchange traded funds (ETFs) which are listed funds that hold other liquid assets.

An illiquid asset is one that you can’t quickly turn into cash (at reasonable valuation). Examples are closed funds (ones you can’t withdraw from without penalty before a certain date), all non-securitized real property such as your houses and any commercial real estate you may own, shares in an unlisted start-up or in an unlisted mature business such as your family business, shares in a private equity or venture capital fund, or a loan you may have granted privately to a friend.

An alternative asset as we use the term is any asset different from a traditional listed stock or bond for which trading volumes are high.

As we show in the diagram above, all illiquid assets are alternative but not all alternative assets are illiquid. To see that, recall how I mention above that publicly traded derivatives and real estate securities such REITs are examples of liquid assets. Yet they are not traditional stocks or bonds. So they must be alternative assets. Liquidity, in other words, does not disqualify an asset from being alternative.

I hope this helps!

Update History:

• 6 April 2018: “As we show in the diagram above, all illiquid assets are alternative but not all alternative assets are liquid illiquid.“