Big investment funds have a secret limit on how much they can invest that has absolutely nothing to do with making money.
March 20, 2026
Original Paper
The Illiquidity Budget in Modern Portfolios: Structural Limits to Private Market Allocation
SSRN · 6313378
The Takeaway
While investors usually try to maximize returns, this paper shows that 'cash flow physics' imposes a limit on private equity allocations. Because these funds can 'call' for cash at any time, a portfolio eventually hits a point where it simply cannot handle the volatility of those cash requests without a total balance-sheet breakdown.
From the abstract
This paper examines the critical challenges institutional investors face when integrating illiquid private assets into diversified portfolios. We address two fundamental questions. First, how should exposure to closed-ended private limited partnership funds be properly defined? Second, what determines the maximum sustainable allocation to private markets? We demonstrate that no single exposure metric serves all purposes. Risk management requires measuring remaining invested capital (RIC), invest