Demand for alternative assets has soared in recent years, as investors have sought yield and low NAV volatility outside the bond market in a low interest rate world. The investment trust sector has been a major beneficiary, with many closed-ended funds offering these characteristics through their ability to invest in illiquid assets. Historically, alternative assets have offered the potential for higher returns by (in technical terms) harvesting the illiquidity premium. In more natural language this just means that investors pay lower prices for less liquid investments and therefore receive higher returns. Inevitably, the likelihood is that the wall of money coming into alternatives has eroded the returns available from investing in more established illiquid asset classes. In other words, the illiquidity premium has been reduced in some areas, with familiarity (and the ability to access an illiquid asset class through a more liquid closed-ended fund) meaning investors require less compensation for the higher risk of holding an illiquid asset.
