Updated October 2026 · Mike Shell, Chief Investment Officer

The illiquidity premium is the extra return investors expect for owning something they can’t sell quickly at a fair price, such as private equity, private credit or private real estate. It’s the price of giving up the exit.

What you can’t sell, you can’t exit.

Why it matters. Private investments are often presented with higher returns and lower volatility. Part of the higher return is pay for being locked in. Part of the lower volatility comes from how they’re priced: appraised every quarter rather than traded every day, so a decline shows up late and smaller. Lock-ups, redemption gates and capital calls decide when money can come out. In late 2022, some of the largest non-traded real estate funds limited withdrawals when requests exceeded their caps.

The math. The premium is earned only if the illiquid asset returns more over its life, after its fees, which are usually higher. Smoothing flatters the statistics. If each reported return blends half of the quarter’s real change with half of the last report, reported volatility comes out about 42% below the real figure, and the Sharpe ratio looks about 73% better than it is.

How it’s applied in ASYMMETRY® Managed Portfolios. Accounts in ASYMMETRY® Managed Portfolios stay liquid, with no lock-ups and no redemption gates, so every position can have an exit. When an outside manager or a private structure is considered, you’re told in writing what it is, what it costs and how easily you can get out. It has to earn its place after costs.

Common misconceptions. Illiquid isn’t less risky. It’s less visible. The premium isn’t guaranteed; it’s an expectation, and higher fees can take it. Smoothed prices also make private assets look less correlated with stocks than they are. And liquidity tends to disappear when it’s needed: a fund that pays redemptions in calm markets can gate them in a crisis, the moment investors want out.

Related terms. Liquid alternative investments: the other side of the trade-off. Exit: what illiquidity gives up. Alternative investments, correlation, Sharpe ratio and maximum drawdown follow in the lexicon. Part of the ASYMMETRY® guide to asymmetric investing.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and portfolio manager of ASYMMETRY® Managed Portfolios, with nearly three decades of live-market experience across multiple full market cycles.