Semiliquid funds often have more complex fee structures than ETFs, adding borrowing costs and incentive fees.
The average annual report net expense ratio for semiliquid funds was 3.14% at the end of 2025. Meanwhile, the average annual net expense ratio for ETFs was 0.61%, while mutual funds charged 0.97% on average.
The implication is obvious: Private market return premiums will need to be significantly above public markets to overcome these fee hurdles.
Here’s why these fees are so high.
First, semiliquid funds usually employ leverage, which is the use of debt or debt-like instruments to increase the fund’s asset base. That leverage comes with borrowing costs.
Semiliquid funds also often charge incentive fees, which can be material and sometimes rival—or even exceed—the management fee in terms of magnitude. Incentive fees, sometimes called performance fees, typically have three parts: the actual incentive fee, the hurdle rate, and the catch-up.
- The “incentive fee” is a percentage of the fund’s return that the fund company earns should the fund clear its “hurdle rate.” Importantly, once the fund clears the hurdle, the incentive fee then gets applied to the whole return, not just the amount above the hurdle rate.
- A catch-up allows a fund to take all the excess return over the hurdle rate until its share of the total return is equal to the incentive fee. So, if a fund’s incentive fee is 15%, it gets to keep 100% of profits above the hurdle rate until its share of the total return is 15%.
Some funds also have substantial “acquired fund fees,” which are fees paid to underlying funds held in the portfolio.
Additionally, most funds employ a 100% catch-up provision. That means their hurdle rate can be effectively irrelevant, provided that the fund earns at least enough to capture its full catch-up.