As public and private markets converge, asset managers are selling more and more complex investment funds to retail investors. A day rarely goes by without the introduction of a new interval fund or other semiliquid vehicle claiming to provide individual investors access to asset classes and strategies to which mutual funds can offer only limited, if any, exposure. To help investors keep level heads and perform their due diligence on these often opaque, arcane, and more costly vehicles, Morningstar has launched the Morningstar Medalist Rating for Semiliquid Funds, a forward-looking assessment of semiliquid strategies’ performance potential versus relevant peers and traditional mutual and exchange-traded funds. We expect to launch initial ratings on a set of interval funds in the third quarter of 2025, which will be displayed on Morningstar.com as well within products in the Direct Platform, including Morningstar Direct, Direct Advisory Suite, and in data feeds associated with select interval funds.
The need for such a tool is clear. Interval funds, which limit shareholder redemptions so they can exceed the SEC’s 15% limit on illiquid securities for traditional mutual funds, are growing fast. As of April 30, 2025, Morningstar tracked around 500 US-domiciled semiliquid funds, 143 of which were interval funds. Interval funds’ assets under management have grown to near $100 billion in the past year, increasing roughly 45% since March 2024. More than a fourth of those assets are in Cliffwater Corporate Lending CCLFX, which grew from USD 17.4 billion to USD 27.8 billion in the year ending in March 2025. For those with access to Morningstar Direct, click here to view the Interval Fund Universe.
It’s a new, wild frontier for most investors. To help them make sense of it, we’ve expanded upon the same rigorous approach we’ve employed since 2011 to help investors make confident and well-informed decisions about investment strategies. The Medalist Rating for Semiliquid Funds aims to identify strategies that are likely to outperform relevant public-markets equivalents, broad private indexes, and relevant peers.
Join our Morningstar Medalist Rating for Semiliquid Funds: A New Framework for a Converging Market webinar on May 28 to learn more about this new methodology.
The goal is to help investors decide if these more costly, less liquid, and more opaque strategies are worth it. Do they actually offer diversification benefits or return potential that affordable, liquid, and transparent mutual and exchange-traded funds can’t approximate? Our ratings will shed light on the potential benefits as well as the true costs, risks, and limitations of a wide range of vehicles, including interval funds, tender-offer funds, nontraded business development companies, and nontraded real estate investment trusts in the United States, as well as certain European long-term investment funds, United Kingdom long-term asset funds, and certain Australia-domiciled managed investment schemes.
Before getting into the methodology, let’s define some terms. “Semiliquid” means vehicles that offer their shareholders fewer opportunities to redeem their shares than ETFs, which can be bought and sold throughout the day, and mutual funds, which let their owners transact at the end of each trading day. Semiliquid vehicles, however, offer more redemption opportunities than many hedge funds and private capital strategies that can lock up assets for months, quarters, or even years. The jargon flies fast and furiously around these structures and often conceals more than it clarifies. Fund proprietors sometimes use terms like “evergreen,” “perpetual capital,” and “semiliquid” interchangeably when discussing any funds that allow investors to buy in at periodic intervals, have some provision for intermittent liquidity, and/or have no predetermined end. The phrases can apply to heavily regulated structures like interval funds and ELTIFs, but also to more lightly ruled private capital limited partnerships that can operate indefinitely, or “evergreen LPs.” Our methodology doesn’t apply to the latter structure.
A Peek Into the Methodology
In more than two decades of manager research, Morningstar’s global analyst team has identified three key areas of qualitative analysis that evidence suggests are crucial to predicting the future gross performance of investment strategies: Process, People, and Parent. These three pillars form the spine of Morningstar’s research approach, with analysis coalescing around an evaluation of the strategy’s underlying investment process, the management team, and the parent firm. In this way, the analysis considers not just each pillar in isolation, but also the interaction among them, which is crucial to understanding a vehicle’s overall merit.
We’ve expanded our existing methodology to suit these more complex and less transparent investment options. As compared with the Morningstar Medalist Rating methodology for traditional, actively managed funds, we’ve determined that semiliquid funds require a higher weight on the Parent Pillar, given the importance of the overall organization in deal sourcing, security valuation, and governance. Likewise, a higher weight on the Process Pillar reflects the added complexities and risks inherent to portfolios with intermittent liquidity that potentially hold private assets. For semiliquid funds, Process constitutes 50% of the Medalist Rating, with People and Parent each weighing in at 25%. Further, given the frequent lack of daily prices for underlying holdings, we don’t measure semiliquid funds on their ability to beat an estimated expected risk-adjusted return for their category as we do most funds that receive Morningstar Medalist Ratings. Instead, we seek to identify funds that can deliver excess returns over the relevant benchmark and outperform relevant peer groups.
While vetting these options, Morningstar analysts will still consider whether their managers’ approaches have clearly defined, repeatable, and effectively implemented competitive advantages, as well as robust risk controls. They will, however, likely spend more time evaluating how funds manage the risks of portfolios that include less-liquid or illiquid securities, especially private investments. Funds that limit redemptions, such as interval funds, could still face liquidity-mismatches if they have too much money in securities that rarely trade when a critical mass of investors asks for their money back. On the other hand, interval funds that charge high fees for stashing most of their assets in liquid assets common to lower-cost mutual funds or ETFs may not be worth the bother. Assessing how funds handle these risks is critical. Additionally, analysts will spend time evaluating the reliability of valuation methodologies for nontraded assets, which require careful scrutiny when rating strategies that hold less-liquid or illiquid assets.
When it comes to evaluating the people and parent companies behind these strategies, firm and investment team experience and capabilities in illiquid assets, sourcing deals, and managing the deal allocation, valuation, and exits processes will loom large. Transparency is also important. Alternative asset managers are knocking on the doors of individual investors, not the other way around, and retail investors are used to getting more information about portfolios than private investment managers are used to providing.
Last, and far from least, cost still matters. While not an official ratings pillar, price directly affects a vehicle’s ability to outperform—the higher the fees, the harder it is to win. After scoring vehicles’ Process, People, and Parent Pillars, analysts adjust the ratings according to where the strategies’ fees rank in relevant fee-comparison groups. Scores can move up, down, or not at all depending on if they look cheap, expensive, or average relative to comparable peers. (See the methodology document for more details.)
History Rhymes
This is not the first movement to democratize alternative investments. Over the years, firms have offered various liquid alternatives approaches—like long-short, market-neutral, merger arbitrage, and others—intended to bring hedge-fund-like strategies to the masses. They’ve all had plausible rationales, and some have proved to be enduring investments, but they are also fraught with risk and hard to use well. Investors still lack awareness of these funds’ challenges and risks, and often fail to form realistic expectations for them. Performance chasing has been rampant, for instance, among liquid alternative funds.
Approach semiliquid funds, whether they own private assets or not, with caution. Investor protections are not as strong as they are with mutual funds, and dealing with periodic redemption windows will differ from what most individual investors are accustomed to practically. Academics and practitioners contend private and hard-to-trade assets should offer extra returns for their illiquidity, but there’s no guarantee a fund will realize them. Investors should also think twice about giving up transparency and paying higher fees. It’s important to ask whether these offerings are really a solution or if they just present new problems.
