THE LIQUIDITY PARADOX
Hedging in open-ended fund structures
KEY TAKEAWAYS
PE hedges differently:
PE firms leave space for upside in their hedging instruments.
The paradox:
Hedging tenors for PE funds tend to be longer dated while more credit funds use shorter tenors compared to other asset classes.
Evergreen liquidity:
Most PE funds with shorter-dated hedging tenors are open-ended.
Hedging is a critical tool for funds that raise and deploy capital globally to protect themselves from currency risk. Against a volatile macroeconomic backdrop and an increasingly challenging fundraising and exit environment, that imperative is only growing.
Open-ended structures have emerged as the vehicle of choice for GPs seeking wider investor access, periodic liquidity provisions and more stable long-term capital. Without a fixed term, they allow continuous fundraising and longer deployment horizons, meeting demand that closed-ended funds weren't built to serve.
But with perpetual capital comes perpetual complexity: Redemption cycles, tighter bank credit appetite and the need for active liquidity management create a materially different operating environment. As Validus data shows, how funds hedge in response isn't just a function of strategy, but also of structure.
85%
Of short-dated PE hedges are for open-ended funds
36%
Of PE funds using options/ structured products to hedge
Source: Validus Data
FIGURE 1 - Preferred hedging instrument by asset class
FIGURE 2 - Hedging tenor by asset class
