Practice chapter · in depth
By Niko Hatziiosifidis · last reviewed 23 Aug 2026
Liquidity management tools (LMTs) are the toolkit with which open-ended funds steer redemptions without having to force-sell assets straight away. They work either through price (swing pricing, anti-dilution levy), through quantity and time (notice periods, gates) or through structure (side pockets, redemption in kind, suspension). With AIFMD II (Directive (EU) 2024/927, to be transposed by 16 April 2026), open-ended AIFs must anchor at least two of these tools firmly in the prospectus — for you as an investor that means: the rules of the game for the stress case will in future be set out in black and white in the fund documents.
Swing pricing shifts the share price (NAV) in the direction of the net flow of money: if redemptions predominate, the NAV is adjusted downwards by a swing factor — whoever sells bears the transaction costs themselves instead of loading them onto the remaining investors. A worked example: NAV €100, net outflows exceed the threshold (say 1% of fund assets), swing factor 2% → all redemptions that day are settled at €98; anyone who stays invested is protected. With full swing pricing the adjustment is made on every net flow, with partial swing pricing only above a defined threshold — in practice the partial variant dominates. In Luxembourg the tool has been standard for years: the ALFI survey 2015 already showed that two thirds of the managers surveyed apply swing pricing; the ALFI Swing Pricing Guidelines (2022 update) are the industry standard for calibration and governance. In Germany swing pricing has only been permitted under the KAGB since 2020; practice is governed by the guidance from the BVI and the Deutsche Kreditwirtschaft. Worth knowing: the IMF (GFSR Oct 2022, ch. 3) shows that swing pricing dampens the first-mover advantage — but criticises the fact that many funds cap their maximum swing factors too low to reflect the full burden of liquidity costs in genuine stress.
The anti-dilution levy (ADL, redemption discount) pursues the same aim as swing pricing, but by different technical means: the NAV stays unchanged; instead the redeeming investor pays a fee that flows into the fund — not to the manager. A worked example: a redemption of €10,000, levy 2% → you are paid out €9,800, €200 remains in the fund and compensates the other investors for the selling costs. The difference from swing pricing: the ADL hits only those who actually transact and can be activated selectively, whereas the swung NAV applies to all transactions of the day. How drastic an ADL can be was shown by the UK property fund case of 2016: after the Brexit vote, Aberdeen initially applied a discount of 17% to its UK property fund, later reduced to 7% and, at the end of July 2016, to 1.25% (Mortgage Solutions, 2 August 2016). In parallel, nine of fifteen daily-dealing UK property funds applied fair value discounts of 4–15% (FCA DP17/1). The ESMA guidelines of 15 April 2025 require ADLs to be calibrated on the same factors as swing factors.
A notice period forces you to register your redemption weeks or months in advance — the manager gains time to handle sales in an orderly way instead of at distressed prices. With ELTIFs the period is even tied by regulation to the liquidity buffer and the redemption ratio (Delegated Regulation (EU) 2024/2759, Annex II): 12 months' notice ⇒ 10% minimum liquidity and up to 100% redemption per date; 6 months ⇒ 15%/67%; 3 months ⇒ 20%/50%; 1 month or less ⇒ 25%/20%. The logic as a worked example: if you accept 12 months' lead time, the fund may invest 90% of its assets illiquidly — if you want out monthly, it has to hold a quarter liquid and may still pay out only 20% per month. Longer notice periods are therefore not an instrument for harassing investors but the price of higher private markets allocations. The IMF, too, recommends tying redemption terms to portfolio liquidity (GFSR Oct 2022).
With redemption in kind you receive a pro-rata basket of the fund’s assets instead of cash. At ETFs with institutional market makers this is everyday business — at semi-liquid private markets funds for retail investors it is practically unusable: nobody can book a twentieth of a commercial property or a mini-stake in a private equity holding into your securities account, and even if they could, you could neither value nor sell it. AIFMD II draws the consequence: redemption in kind (Annex V No. 8) may be activated only to meet redemptions by professional investors and must correspond to a pro-rata share of the fund’s assets; exceptions apply only to funds distributed purely to professionals and to index-tracking ETFs (Directive (EU) 2024/927, Art. 16). For you as a retail investor this tool is therefore effectively off the table — and that is a good thing.
A side pocket splits assets that cannot be valued or sold off from the rest of the fund. The liquid part goes on trading normally; the separated part is frozen until realisation or valuation becomes possible again. A worked example: a fund with €500 million holds 5% of assets that become unvaluable overnight → €25 million moves into the side pocket. You then hold two positions: 95% of your share value remains tradable daily, 5% sits in non-redeemable side pocket units that are paid out only once the assets have been sold or can be valued again — but you keep the claim on any later recovery in value. The real case: after Russia’s attack on Ukraine, Russian securities became untradable; on 16 May 2022 ESMA made clear that managers should consider side pockets or similar separations (ESMA34-45-1633), and national supervisors such as the CSSF (three routes: share class, separation, side pocket) and the Central Bank of Ireland (a clone-fund model with fast-track approval) created the procedures for it (BBH analysis). Under AIFMD II, side pockets are Annex V No. 9 — only for exceptional situations such as valuation uncertainty, fraud or war (ESMA guidelines 2025).
The redemption gate (Annex V No. 2) — the pro-rata scaling back of all redemption orders — we cover in detail in the chapter on Gating & Redemption Restrictions. Full suspension (Annex V No. 1) is the hardest stage: no subscriptions, no redemptions, often for months. As with side pockets, AIFMD II permits it only “in exceptional cases where circumstances so require” and in the interests of investors (Art. 16 of Directive (EU) 2024/927). What a suspension feels like is shown by the cases discussed in the gating chapter — above all the six UK property funds with around £14.6 billion between them that froze within four days in July 2016 (FCA DP17/1).
With Directive (EU) 2024/927 (transposition deadline 16 April 2026), Annex V lists nine harmonised tools EU-wide for the first time: suspension (1), gate (2), extension of the notice period (3), redemption fee (4), swing pricing (5), dual pricing (6), anti-dilution levy (7), redemption in kind (8), side pockets (9). Every open-ended AIF must select at least two tools from Nos. 2–8 — suspension and side pockets do not count towards the two, because as emergency crisis instruments they are open to everyone anyway; only money market funds may confine themselves to one. On 15 April 2025 ESMA published its final reports on the RTS and the guidelines, recommending in them (“should consider, where appropriate”): at least one quantity-based tool plus one anti-dilution tool (ESMA Final Report). Decisive for you: the selection, calibration and activation conditions of the chosen LMTs must in future be disclosed to investors — in the prospectus or the pre-contractual information (Dechert analysis).
Where to look. In the prospectus you will typically find the LMT selection in the sections “Redemption of Shares”, “Liquidity Management” or “Risk Factors”; with Luxembourg vehicles often also in the General Part under “Net Asset Value” (swing pricing) and “Redemptions” (gates, notice periods). From the transposition of AIFMD II onwards, the at least two chosen tools from Annex V Nos. 2–8 must be named expressly, together with their activation conditions — search for the terms “liquidity management tools”, “swing pricing”, “anti-dilution” and “notice period”. If such a passage is missing from an open-ended AIF launched after April 2026, that is a warning sign of out-of-date documents.
The logic of combining them. The ESMA recommendation — one quantity-based plus one price-based tool — has a reason: the two families solve different problems. Price-based tools (swing pricing, ADL, redemption fee) internalise liquidity costs and take away the incentive to be the first to redeem — they work preventively and as a damper, as the IMF shows empirically (GFSR Oct 2022, ch. 3). Quantity-based tools (gate, extension of the notice period), by contrast, limit the volume when the outflow comes anyway. A fund secured only on the price side can run dry in a genuine run; a purely quantity-based fund leaves those who stay to bear the costs of those who go. A pair such as “ADL + gate” or “swing pricing + extendable notice period” covers both flanks.
What the calibration reveals. The parameters are an X-ray of a manager’s honesty. A maximum swing factor of 1–2% at a fund with an 80% private markets allocation signals that the factor follows marketing considerations rather than the real liquidity cost curve — the IMF criticises precisely these excessively low caps, because they screen out the price effect of forced sales. Conversely, an ELTIF structure that voluntarily pairs a 12-month notice period with only a 10% liquidity buffer (Delegated Regulation 2024/2759) shows that the manager takes illiquidity seriously instead of feigning daily tradability. Check also who activates: is the threshold fixed in the prospectus (rule-based) or at the manager’s discretion? Rule-based triggers protect you from the hesitation that drove the UK funds into suspension in 2016.
The share price is reduced by a factor when net outflows are high (and raised when there are inflows), so that those who transact bear the transaction costs themselves. Example: NAV 100, swing factor 2% → redemption at 98. Remaining investors are thus protected against dilution.
The separation of assets that cannot be valued or sold into a separate, frozen segment. The rest of the fund goes on trading normally; your side pocket units are paid out as soon as the assets can be realised — as happened in 2022 at European funds holding Russian securities.
A redemption discount charged on redemption that flows into the fund — not to the manager. Unlike swing pricing, the NAV stays unchanged; only those who transact pay. In the extreme UK case of 2016 the discount at Aberdeen was initially 17%.
Payment in assets instead of money. At private markets funds for retail investors it is hardly practicable — which is why under AIFMD II the tool is restricted to professional investors and pro-rata transfers.
AIFMD II (Directive (EU) 2024/927, Annex V) lists nine tools. From transposition (16 April 2026), open-ended AIFs must choose at least two from Nos. 2–8; suspension and side pockets do not count towards the two but are additionally available in exceptional cases.
In the prospectus under “Redemption”, “Liquidity Management” or “Net Asset Value”. From April 2026 the selection, calibration and activation conditions of the chosen tools must be disclosed there.
Last reviewed: 23 Aug 2026 · Methodology · Not investment advice.