Skip to content

FRM Part II · FRM Exam Part II · Illiquid Assets

A fund of funds has 30% of its portfolio in private equity with a 10-year lock-up and uncalled commitments, while offering investors quarterly redemptions. In a market stress, liquid assets fall sharply and redemption requests rise. Which risk is most directly illustrated?

The scenario shows an asset-liability liquidity mismatch. Quarterly redemptions are funded from liquid assets while private equity is locked up and commitments may still be called, so the illiquid share rises and liquidity deteriorates for remaining investors.

  1. AAsset-liability liquidity mismatch that may force sales of liquid assets, raising the illiquid share (denominator effect)Correct
  2. BPure credit risk from counterparty default on the private equity funds
  3. CModel risk arising from using a single-factor beta
  4. DBasis risk between the benchmark and the fund's hedges

Explanation

Offering short-dated liquidity against long-lock-up assets creates a mismatch. Meeting redemptions from liquid holdings leaves a growing illiquid proportion and uncalled commitments still require funding. Credit, model and basis risk are not the central issue.

Did you get it right without looking?

One question tells you little. A timed set on Illiquid Assets shows your real accuracy, how long you take and where you lose marks.

Practise Illiquid AssetsFree diagnostic mock

More Illiquid Assets questions