Investments With the Lowest Liquidity

Liquidity is what determines how quickly and easily an asset can be converted into cash without significantly affecting its price.

The most liquid assets are stocks and ETFs, which can be sold in seconds with minimal price impact, but on the other side of the spectrum are investments that lock your capital away for a longer period of time, offering a potential for higher returns and diversification benefits that do not come with highly liquid assets.

Types of Investments With Low Liquidity

These are the most commonly invested in assets that come with low levels of liquidity:

Private Equity

Private equity investment includes buying into companies that aren’t listed on public exchanges, which not only means that you cannot track or trade your position, but that you are also committing your capital for a fixed period, usually ranging from 5 to 10 years.

This makes private equity one of the least liquid types of investments, as even when you have the ability to exit early, it often requires accepting a discount, which can significantly impact your profit.

Private equity investment is most commonly reserved for hedge funds and institutional investors, or those individuals with much longer investment horizons and higher risk tolerance.

Venture Capital

Where private equity investment is based around investing in established companies, venture capital focuses on early-stage startups. 

As you can imagine, this is an even riskier and more uncertain investment venue, as you’re committing to unproven businesses in hope that the faith you have will lead to a massive upside in the future.

Most investors in this arena have to wait for a liquidity event to occur, which is usually an acquisition or an initial public offering, but as you can imagine, these events can take many years to happen, or the business can simply not live long enough to become a publicly traded company.

The lack of reliable secondary markets means that, once invested, capital is essentially tied up until the company succeeds or fails. This combination of uncertainty and long timelines makes venture capital one of the least liquid investment categories available.

Real Estate

Real estate investments are also inherently illiquid, representing a stable and tangible type of long-term investment.

Even if you want to sell a property, it usually takes a longer period of time, which can span from a few weeks to a number of months. 

Real estate assets are also highly impacted by market conditions, so in uncertain times the liquidity of these investments can rapidly deteriorate. 

Transaction costs further complicate the picture. Agent commissions, legal fees, and taxes can significantly reduce the net proceeds, especially if a quick sale is required.

Art and Collectibles

Investing in art or collectibles is also a unique and highly illiquid investment types.

For starters, the assets in this market are not traded on exchanges, and their value depends on a number of factors, such as condition, rarity, market demand and more, all of which can fluctuate over time.

Even when you decide to sell your asset, the process can take months or even years, as it typically involves auctions or private negotiations, with no guarantee that the final price will meet your expectations.

While collectibles can appreciate significantly, they lack the transparency and immediacy of traditional financial markets, making them one of the least liquid asset classes available.

Hedge Funds

While hedge funds often invest in highly liquid assets, what makes them illiquid is the fact that investors commonly face restrictions on their withdrawals.

This is due to the existence of lock-up periods during which you simply cannot access your capital, or due to limited redemption windows which can occur on a quarterly or annual basis.

Many hedge funds also require you to give them an advance notice, often 30 to 90 days before withdrawal. Another thing making this a low-liquid type of investment is that hedge funds can also impose restrictions on large-scale redemptions during periods of market stress.

As a result, investors cannot rely on immediate access to their capital, even if the fund itself holds tradable assets.

Private Credit and Direct Lending

Private credit has emerged as one of the fastest-growing segments of the financial market, but it shares many of the same liquidity constraints as private equity.

As these are private loans, outside the traditional banking system, they are usually long-term and not traded on public markets, which means that as an investor, you simply cannot sell your position whenever you want.

 In fund structures, redemptions may be limited or gated, particularly during periods of high withdrawal demand.

While private credit can offer attractive yields, it requires a willingness to commit capital for extended periods without guaranteed liquidity.

Business Ownership

If you own a private business and are looking to sell it one day, you are in possession of one of the most illiquid forms of investment.

This is not only due to the fact that private businesses are not publicly traded, but also because exiting a business and finding a buyer is usually a complex and long legal and financial process.

This can take months or years, depending on the size of the business, industry conditions, and overall economic environment.

Even partial ownership stakes can be difficult to sell, especially if there are restrictions in shareholder agreements.

Why Investors Still Choose Illiquid Assets

Despite these limitations, illiquid investments remain a core part of many portfolios.

The most obvious reason is that these investments usually come with much higher potential returns, as giving up liquidity is usually compensated with an illiquidity premium, which are additional returns that you will get for accepting reduced flexibility.

These investments also allow for high levels of diversification, as many of them are less correlated with public markets, and can stabilize your portfolio during periods of high volatility.

However, these benefits only materialize when the investment horizon aligns with the nature of the asset. Illiquidity is manageable when planned for, but can quickly become problematic when unexpected.

Final Thoughts

Liquidity is easily the most defining characteristic of any investment.

These assets come with some of the highest potential returns and allow for great diversification opportunities, but are also not suitable for those investors that can commit capital for extended periods of time or navigate complex exit processes.

In simple terms, the less liquid the investment, the more important timing becomes.