McDermott Will & Schulte, a global law firm

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Liquidity is often discussed as a crisis management issue. In reality, effective liquidity management begins long before markets become volatile.

During London Hot Topics 2026, Christopher Hilditch and Amy MacDonagh explored how fund managers can build resilient liquidity frameworks that protect both portfolios and investor relationships. Their discussion highlighted a simple but important principle: The most effective liquidity tools are those that are carefully designed before they are ever needed.

Start with the portfolio, not investor demands

When designing liquidity terms, managers can face competing pressures from investors, peers, and market expectations. However, the discussion emphasised that liquidity terms should always be driven by the underlying portfolio and investment strategy.

A common challenge arises when liquidity terms fail to reflect the reality of the assets being managed. While offering investors frequent redemption rights may appear attractive during fundraising, problems can emerge if those assets cannot realistically be liquidated within the required timeframe.

As the panel noted, funds rarely encounter difficulties because of a single market event. More often, challenges arise when the liquidity profile of the portfolio becomes misaligned with the terms offered to investors.

Managers should therefore ask two key questions:

• How quickly can assets realistically be sold or rebalanced?
• Does the strategy require additional protections such as lock-ups, gates, or other liquidity controls?

Addressing these questions early can help prevent difficult conversations later.

Preserving optionality matters

Periods of market stress test every aspect of a fund’s liquidity framework.

While no manager expects to rely on emergency powers when launching a fund, the panel emphasised the importance of preserving optionality through carefully drafted fund documentation.

Examples discussed included:

• Fund-level gates;
• Suspension rights;
• Redemption-in-kind provisions;
• Slow-pay mechanisms; and
• Alternative distribution structures.

These tools serve different purposes and should not be viewed as interchangeable.

A fund-level gate, for example, can slow redemption activity and support orderly portfolio management. Redemption-in-kind provisions may help preserve value by avoiding forced sales. Suspension rights can provide breathing room in exceptional circumstances.

The key message was clear: Managers should resist the temptation to negotiate away important protections simply to accommodate investor requests during fundraising.

Terms that appear unnecessary during favourable market conditions can become critical when liquidity pressures emerge.

Governance and judgment are just as important as documentation

One of the strongest themes from the discussion was that liquidity management is not solely a legal or operational exercise.

The effectiveness of any liquidity framework ultimately depends on the quality of decision-making and governance surrounding it.

Even well-designed liquidity tools can create challenges if they are used too early, too late or without a clear rationale.

Acting too quickly may signal distress and accelerate redemption activity. Acting too slowly can result in value destruction and a loss of control.

The panel highlighted the importance of:

• Active board engagement;
• Clear escalation processes;
• Independent challenge and oversight;
• Consistent decision-making; and
• Early involvement of advisors, where appropriate.

Strong governance helps ensure that managers can act decisively when required, while maintaining confidence among investors and other stakeholders.

Communication remains critical

Perhaps the most important takeaway from the session was that liquidity events are often communication challenges as much as they are financial or legal ones.

Too much information can create instability. Too little information can undermine trust.

As a result, managers must balance the need for transparency with the need to avoid creating unnecessary concern among investors.

Communication should begin internally, ensuring that boards, advisors, and key stakeholders are aligned before engaging with investors. When communicating externally, messages should be clear, consistent, and proportionate to the circumstances.

The discussion reinforced that maintaining investor confidence during periods of stress often depends on the quality of communication as much as the underlying liquidity tools themselves.

Looking ahead

As markets continue to evolve, liquidity management remains a core component of fund resilience.

Managers who take the time to align liquidity terms with their investment strategy, preserve optionality through appropriate structures and tools, and maintain strong governance frameworks will likely be better positioned to navigate future periods of market uncertainty.

Liquidity management is ultimately about more than protecting portfolios: It is about protecting investor confidence and ensuring that funds can continue to operate effectively through both calm and challenging market conditions.

Continue the conversation

If you would like to discuss any of the themes highlighted above, please reach out to Christopher Hilditch, Amy MacDonagh, or your usual McDermott Will & Schulte contact.