With new regulation incoming and investor demand continuing to grow, Matt Pells (Product Manager, Transfer Agency, Bravura), discusses why liquidity management capabilities backed by flexible technology are essential when dealing with the operational challenges posed by hybrid funds.
Once viewed as a novel bridge between the less liquid world of private markets and the tradability of public markets, hybrid funds have increasingly caught the attention of UK investors since the launch of the Long-Term Asset Fund (LTAF) in 2023.
Although hybrid fund structures (the ability to combine illiquid private assets with a portion of liquid public market securities) have existed in various forms for decades, their prominence has grown significantly in recent years, driven by the global private markets sector which is projected to nearly double to $29.2tr in AUM by 2030¹.
There are various reasons for the increase in popularity. Potentially higher yields (also known as the illiquidity premium), regulatory backing, product innovation to make them more accessible and a growing appetite for alternative asset exposure and diversification are all playing a part.
While this is creating an opportunity for fund managers to play a strategic role in the next generation of fund design, it is also creating operational and regulatory complexity to ensure that these new types of funds can weather quickly changing market conditions given the liquidity constraints they face.
From niche to mainstream
Before formal structures were introduced in the EU and UK, hybrid funds existed informally as closed-ended or semi-liquid vehicles with limited redemption windows. These early models offered alternative exposure but, crucially, lacked the regulatory clarity and retail accessibility we’re seeing today.
Then, in 2015, European Securities and Markets Authority (ESMA) approved the launch of the European Long-Term Investment Fund (ELTIF) and the UK’s Long-Term Asset Fund (LTAF) followed in 2023 after a similar move by the FCA. These opened up private markets to everyday investors and due to demand, other firms have followed suit.
Last year (2024), both Legal & General Investment Management (LGIM) and M&G Investments launched their own hybrid funds, marking yet another a structural shift in how fund managers are designing products to meet demand for income, diversification and long-term capital growth.
This isn’t an isolated trend. According to Caceis’ 2024 survey², 109 of the 124 fund managers surveyed said they currently offer, or plan to offer, at least one hybrid fund. However, this doesn’t come without certain teething issues. Just over half the respondents believe that the current lack of standardised reporting for hybrid funds will create difficulties for institutional investors.
Hybrid funds: a challenge and an opportunity
For fund managers, hybrid funds represent both a commercial opportunity and an operational challenge. They unlock access to fast-growing private markets and create new ways to meet the needs of modern investors. But they also require managers to rethink how they handle liquidity, data, reporting and compliance – across multiple asset classes and regulatory regimes.
Managers must now combine the oversight of traditional portfolios with the flexibility and rigour required for illiquid holdings. That means reconfiguring processes around fund pricing, valuation frequency, redemption protocols, investor communication and market disclosure. Doing this manually or with legacy tools introduces risk and friction.
Yet, for those who can adapt, there is a clear upside. Hybrid funds offer an avenue to evolve alongside their clients, deepen relationships and potentially grow their books by creating the next generation of funds.
This is where asset servicers are stepping up. From onboarding and fund structuring to data reconciliation and liquidity modelling, specialist administrators are enhancing their platforms to support hybrid fund needs. Leading service partners are investing in Liquidity Management Tools, giving fund managers a clearer, more responsive foundation on which to build.
Regulatory spotlight
As more and more fund managers consider launching hybrid funds, regulation is quickly catching up with the pace of innovation. The ELTIF 2.0 regulation officially came into force on 10 January 2024, which was designed to make these vehicles more accessible and appealing by easing investment thresholds and enabling distribution to retail investors. A second phase followed with Regulatory Technical Standards taking effect from 26 October 2024, laying out specific rules on liquidity and redemption.
The most landmark shift will arrive next year. From 16 April 2026, EU Member States must apply an ESMA directive that amends the Alternative Investment Fund Managers Directive (AIFMD) and Collective Investment in Transferable Securities (UCITS) frameworks³. This will impose new obligations on liquidity risk management, delegation and reporting – directly impacting asset servicers, fund managers and transfer agents.
These changes are aimed at strengthening investor protection, but they also place new demands on operational readiness. From onboarding through to reporting, every touchpoint will need to be reassessed to accommodate these new structures – without compromising the flexibility that investors value.
For many, April 2026 is a final deadline to have their house in order.
Liquidity Management Tooling
Recent geopolitical and economic tensions have once again demonstrated that liquidity challenges can emerge swiftly and unpredictably.
By design, hybrid funds contain a significant proportion of illiquid assets – such as private equity or real estate – alongside more liquid public market instruments to facilitate periodic redemptions. This blend offers investors exposure to less correlated, potentially higher-yielding assets, but it also introduces complexity when market stress hits.
There are well-documented cases in the not-so-distant past where liquidity mismatches in funds caused considerable disruption. In such scenarios, funds have been forced to suspend redemptions or hurriedly liquidate assets. And the consequences might not be contained within a single product or firm and markets can tighten rapidly.
To mitigate these risks, effective liquidity management must cover a broad range of activities. This includes forecasting cash flow under various conditions, applying stress testing to simulate redemption spikes, modelling investor redemption behaviour and implementing asset liquidity scoring to assess how quickly assets can be liquidated. It also involves maintaining clear gating mechanisms, using swing pricing to fairly manage subscriptions and redemptions and exploring intra-fund lending strategies.
Strong alignment with custodians is essential to ensure assets can be moved quickly, and above all, there must be transparent, timely reporting to investors and regulators. For this to happen effectively, new technologies must be adopted and existing tools adapted to make them fit for purpose in the era of hybrid funds.
Investing in readiness
It’s clear that hybrid funds will reshape the future of investment management. For fund managers, they represent a valuable chance to stand out in a crowded market and build products that reflect how people really want to invest.
But success will depend on operational readiness. The complexity of hybrid funds can’t be managed with yesterday’s systems. As hybrid funds rise in prominence, so too does the need for asset servicers that offer flexible, digital-first solutions – capable of adapting to new structures, regulatory demands and investor behaviours. Managing complexity isn’t optional; it’s the cost of competing in the next chapter of fund evolution.
¹ – https://www.preqin.com/about/press-release/global-alternatives-markets-on-course-to-exceed-usd30tn-by-2030-preqin-forecasts
² – https://www.caceis.com/fileadmin/documents/pdf/Insights/Reference-Guides/2024/FE-CACEIS-Hybrid-Funds-Survey-2024.pdf
³ – https://www.esma.europa.eu/sites/default/files/2025-04/ESMA34-1985693317-1160_Final_Report_on_the_Guidelines_on_LMTs_of_UCITS_and_open-ended_AIFs.pdf?
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