A new Morningstar report, The Role of Semiliquid Funds in Portfolios, argues that private market allocations through semiliquid funds don’t serve as diversifiers for traditional portfolios. Instead, financial advisors should view semiliquid funds that invest in private equity or private credit as expanding their clients’ overall equity and credit allocations.

The findings counter one of the key benefits advisors point to when allocating to private markets. According to a 2025 advisor survey by alternative investment platform CAIS and financial consulting firm Mercer, most advisors allocate to private debt, real estate, infrastructure, structured notes, hedge funds and natural resources because they view those assets as risk diversifiers. Meanwhile, private equity and digital assets are viewed as “return enhancers.” The survey found that 67% of advisors use interval funds to access private assets, in addition to 54% who use private placements, 46% who invest through BDCs, 36% who allocate to non-traded REITs and 31% who rely on tender offer funds.

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Recently, Morningstar and other market players, such as XA Investments, have sought to increase transparency into the performance of semiliquid vehicles. Last year, Morningstar launched the Morningstar PitchBook U.S. Evergreen Fund Indexes, which track interval funds, non-traded funds, BDCs and non-traded REITs, and began assigning Medalist ratings to evergreen funds. Meanwhile, XA Investments has launched the XAI Interval Fund Index, tracking 77 interval and tender offer funds. 

However, according to Morningstar, to reap the full benefits of semiliquid funds such as interval funds, investors need to stay in them for the long haul—a minimum of seven to 10 years, despite their built-in liquidity features. (Interval funds typically offer monthly liquidity windows, but with caps on monthly and quarterly redemptions.) To compensate for that period of illiquidity, investors should expect returns at least 2% above those delivered by public markets. 

How often semiliquid funds deliver those results is still difficult to determine, said Chris Tate, senior analyst at Morningstar, and one of the report’s authors. (That’s in part due to more than half of all interval funds being less than three years old.) While semiliquid funds can appear to carry those premiums, sometimes that is an illusion—as, for example, when higher leverage is what allows semiliquid funds focusing on private credit to outperform funds investing in syndicated bank loans, according to Morningstar.

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“The overarching message would be to make sure people consider all the pros and cons and go eyes wide open into it,” Tate noted. “Make sure the assets, and particularly the vehicle structure, are right for the clients’ circumstances.”

Tate stressed that semiliquid funds can also increase a portfolio’s volatility. But because private assets in such funds are not priced as frequently as public market assets, it is often hard to assess how much volatility they add or their correlation with public markets. The result is that investments in semiliquid funds appear safer than they are and as though they offer greater portfolio diversification than they actually do. Meanwhile, the higher fees that semiliquid funds often charge further reduce potential returns for investors.

Morningstar data shows that the prospectus-adjusted expense ratios for semiliquid products such as interval funds and tender offer funds average approximately 2.7% and 3.9%, respectively. The average prospectus-adjusted expense ratio for a U.S.-listed ETF is just 0.6%.

To account for these factors, advisors should view private market allocations not as a separate bucket in their clients’ overall portfolios, but rather as contributors to their larger equity and credit allocations. They should set portfolio performance construction goals first, focusing on factors like real returns, income or capital preservation, and identify how much illiquidity their clients can withstand, what their time horizons are and how much risk they can tolerate. Only then should they allocate to semiliquid vehicles that meet these predetermined criteria.

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“Instead of a 10% allocation to private equity and private credit, the question is how much equity and credit risk do I want to allocate to? How much illiquidity risk am I being paid for?” Morningstar researchers wrote. “Private equity is thought of as levered equity risk, long-duration growth exposure, and the illiquidity premium. Meanwhile, private credit is viewed as credit risk plus an illiquidity premium and shorter duration. Capital is not allocated based on prescribed asset-class budgets, but on marginal contribution to the total portfolio.”