18 Aug 2025
The convergence of closed-ended and open-ended investment funds
Fund structures are evolving as managers balance closed-ended stability with open-ended liquidity to meet investor demand.
Alternative investment managers are navigating a fund structure evolution. Driven by investor desire for greater liquidity, they must weigh the benefits of traditional closed-ended, buy-and-hold funds, with their longer-term lock-ups and reliable returns, against the flexible access, but greater operational complexity, of open-ended structures.
“There’s increased demand for flexibility and liquidity,” says Maria Thorsted, Head of Luxembourg at fund administrator Langham Hall. “We’re seeing more open-ended, evergreen or interval funds; and even closed-ended funds implementing liquidity windows.”
Operational innovation, technological development and regulatory shifts are enabling a convergence of open- and closed-ended funds, and broader options for investors. “Investor needs, regulatory changes and market dynamics mean some fund managers mainly active in the closed-ended business are moving into semi-liquid funds which allow periodic redemptions,” says Eckart Vogler, Managing Director of BI-Invest Endowment Management.
This convergence presents opportunities but requires compromise. The more liquid the assets, the lower the overall fund performance. “In trying to make illiquid assets liquid, you lose part of the growth” warns Maria. “There’s a trade-off, and fund managers need to find a balance.” Ultimately, any new structure must align with investor goals and portfolio strategies while ensuring long-term sustainability.
New opportunities: investors and investments
Historically, open-ended funds such as UCITS (Undertakings for Collective Investment in Transferable Securities) or other mutual funds offered liquidity and frequent redemptions, while closed-ended funds prioritised illiquidity premiums and long-term capital deployment in assets such as private equity or real estate. But the dividing line is blurring as retail capital and private wealth managers seek greater flexibility when accessing returns from alternatives.
“There is untapped capital sitting with non-institutional investors – particularly high-net-worth individuals,” says Daniela Klasen-Martin, Country Head, RBSI Luxembourg. To meet their needs, she adds, fund managers are investigating institutional-grade access routes to private markets that do not require fixed lock-up periods.
“Some investors reluctant to invest in closed-ended funds will proceed if a clear exit route exists,’ Maria points out. “Offering hybrid structures or scheduled liquidity windows gives fund managers access to a new segment of the market.’’
These structures also offer fund managers the ability to exploit new investments. “If you have a pipeline of opportunities larger than any of your open funds, you’ve got another option,” says Eckart. “Semi-liquid funds mean you won’t miss a deal because you don’t have capital available in other funds.”
Twin forces: regulatory change and tech innovation
Developments in the regulatory landscape mean fund managers can now offer investment in illiquid assets directly to retail investors. “There’s been a regulatory framework evolution in the EU, establishing authorised structures that offer liquidity while having illiquid assets,” says Daniela. As part of different initiatives to bring investors’ money into the real economy the EU regulator has provided new products to enhance the toolbox available to asset managers, such as the ELTIF, which in its version 2 provides greater flexibility. Alongside the UCI Part II, good options are available to structure open-ended/semi-open-ended funds.
“The UCI Part II fund is popular because it offers high flexibility, while investing in a broad range of assets, including long-term investments like infrastructure plus liquid products,” explains Eckart. “There is, however, governance and compliance complexity in these products.”
This complexity is being made manageable by scalable platforms that can support liquid and hybrid models while operating at the necessary levels of transparency and efficiency. “Being able to access real-time data makes it easier to manage liquidity,” says Maria. “With better oversight and risk monitoring, it’s easier to reap the benefits of illiquid assets while maintaining the liquidity needed to serve these hybrid structures.”
Exploring convergence strategies: key considerations
Liquidity terms need to match portfolio reality
To avoid stress scenarios, redemption options should be carefully structured. “When you’re dealing with real assets, there’s a potential mismatch,” points out Daniela. “You need to align the liquidity required by the investor, to the illiquid nature of the underlying asset.”
There are various tools available to achieve this. “We have a ‘liquidity sleeve’, where a certain percentage of the fund’s assets is invested into liquid assets – government bonds, money market funds, anything that can be easily monetised to meet redemption requests – and held with a custodian,” says Eckart. “And in stress scenarios, queuing or gating is used, whatever best fits the strategy.”
Liquidity gates and redemption queuing mechanisms should be carefully calibrated and disclosed, with a rigid approach taken to liquidity risk management and stress-testing. “Fund managers need to cater for different scenarios, with a clear strategy for how to manage liquidity without impacting fund performance or other investors negatively,” says Maria. In open-ended funds, redemptions may be limited or suspended in exceptional circumstances to protect investors and ensure orderly asset sales.
Bespoke investor communication is required
With private wealth versus institutional fundraising, different communication and engagement models are needed. “Investor reporting will be completely different. It’s not about just sending a quarterly report. You need more specific, more frequent communication,” says Daniela.
Transparency around risks, liquidity mechanics, pricing methodology, NAV frequency, and redemption rights is essential, and updates may require more colloquial language, tailored to a broader audience of retail investors, in line with regulatory requirements and investor protection”
Operational complexity will increase
Hybrid vehicles require specific fund administration, valuation and transfer agency capabilities, and current systems and partners may not support the more dynamic flows. “Managers will face more complexity in liquidity and risk management than with a closed-ended fund,” says Daniela. “In addition, they could have thousands of retail investors as opposed to a limited number of LPs in a closed-ended fund.”
It’s vital to have good operational support, partnering with fund administrators with experience of these operational processes. “You need to build a solid infrastructure for semi-liquid structures with your fund administrator. This includes a distinct accounting and risk management system to model and monitor the liquidity risk,” says Eckart.
Regulatory implications vary by jurisdiction
“Being a regulated fund means having the infrastructure, governance and compliance framework in place, and a set of internal procedures such as internal and external audit, compliance monitoring programmes, and resolution mechanisms in place for potential conflicts of interest,” outlines Eckart.
Understanding the cross-border eligibility of hybrid structures is also critical, especially for retail distribution, and may require a country-by-country approach. “The tax implications for redemptions have to be analysed at the outset to avoid any negative consequences,” warns Maria.
Partnering with banks with multi-jurisdictional fund structuring capabilities can help mitigate risk. “The fund admin can use nominees such as banks for AML or KYC requirements, for example, but enhanced due diligence on any intermediaries will be needed,” says Daniela.
Distribution strategies will need to evolve
Fund managers with semi-liquid products and retail investors need access to wealth platforms, feeder structures and co-investment channels. Banks are an obvious choice as distributors because they already have retail clients and can act as intermediaries “Contracting with distributors like banks will be a new route for typical PE or buy-and-hold strategy asset managers,” says Daniela.
Another option is digital platforms, which match investors with a fund manager via the product the latter launches. “We’re seeing a number of platforms coming out to distribute funds targeting retail clients,” adds Maria.
Take up: the growth of liquid fund structures
According to Carne Group’s 2025 Change Report, 83% of wealth managers already offer semi-liquid funds. And by the end of 2027, rating agency Scope predicts ELTIF volume could reach €65bn-70bn. “We’re seeing more requests for open-ended funds and ELTIFs, and hybrid funds with liquidity windows within the setup,” confirms Maria.
“There’s appetite to go into open-ended funds, and there’s been some take up of ELTIFs, but so far we have observed that traditional PE asset managers have mainly been offering UCI Part II,” adds Daniela. ELTIF is open to pure retail, but there are more constraints in terms of risk management and liquidity management defined by the regulator. “ELTIF’s more rigid in terms of regulatory compliance, whereas the UCI Part II remains more flexible. Given the operational and liquidity risk management challenges, it’s a bigger step for typical PE managers to run an ELTIF than a UCI Part II.” She adds: one advantage of course speaking in favour of the ELTIF as opposed to the UCI Part II is the European passport, which should also be considered when choosing the fund structure.
What next: the evolution of alternative funds
In the future, more typical buy-and-hold funds may move towards the operational model of mainstream open-ended funds, with redemptions and subscriptions as opposed to a commitment model; different distribution channels, via distribution platforms and nominees; and a more complex liquidity management and risk profile.
“I expect that at some point in the near future, there will be convergence between UCITS funds which are predominantly designed for retail investors and with purely liquid assets and these semi-open-ended funds, investing in buy and hold strategies” says Daniela. “ I believe that we will see two main trends in the market: while some fund managers will remain in their niche (either pure liquid or classic closed-ended), others will gradually move to offer a combination of traditional closed-ended products and hybrid open-ended buy-and-hold products.”
This convergence is a strategic move requiring careful alignment between portfolio, investor base and operational readiness. Fund managers and admins will need to upskill their people and adapt operations to ensure that they can handle the necessary liquidity management.
“These products can be a good catalyst to put retail capital to work, help firms grow, help them invest further,” concludes Eckart. “There will be bigger choice for investors, which will bring competition into the market, pushing managers to innovate and become better.”
Fund managers must weigh the advantages of flexibility against added complexity, and greater access against control and returns.
Daniela further adds that bankers will also need to adapt their offer to the liquidity needs of their customers, supporting with tailored solutions as regards deposits and lending.
Please reach out to your RBSI relationship team to discuss any of the themes in this article.
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