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In an open-ended fund (OEF) an investor has the right to have its investment redeemed. The Alternative Investment Fund Managers Directive requires Luxembourg OEFs to implement a liquidity management framework that ensures they can meet investors' redemption requests. OEFs must align their redemption rules with the liquidity of their portfolio. OEFs usually employ liquidity management tools (LMTs) to limit, delay or discourage redemptions.
As from April 16, 2026, Luxembourg OEFs will also be required to implement at least two LMTs from a prescribed list of seven. The tools are divided into two categories: quantitative and anti-dilution LMTs. It is recommended that OEFs apply at least one LMT from each category.
Quantitative LMTs encompass gates putting a cap on the total redemptions allowed during a specific redemption window that may apply at the fund or investor level, extension of notices periods delaying redemptions and redemptions in-kind limiting the need to liquidate assets.
Anti-dilution LMTs include redemption fees payable by departing investors to the OEF, which discourage redemptions and offset liquidity costs for the remaining investors, dual pricing, swing pricing and anti-dilution levies (ADL). Dual pricing means that departing investors receive a price that is discounted from NAV, while new investors subscribe for a price in excess of NAV. Swing pricing uses a single NAV, but when net outflows reach a certain threshold, the departing investors receive a price swung down from NAV and vice versa. ADL refers to a fee imposed on an investor that initiates a sizable redemption.
Dual pricing, swing pricing, and ADL are designed to compensate existing investors for liquidity costs, such as those incurred when the OEF buys or sells assets due to investor in or out flows. Because dual pricing and swing pricing are very similar, they cannot both be selected as part of the two minimum LMTs that are required. In practice, semi-liquid funds often use gates, notice periods extensions and redemption fees, but also lock-ups. Lock-ups are not part of the prescribed list of seven LMTs.
In exceptional circumstances, such as when assets cannot be properly valued, the alternative investment fund manager (AIFM) may temporarily freeze both cash inflows and outflows between investors and the OEF. This ensures that neither departing nor remaining investors are disadvantaged due to inaccurate NAVs caused by market stress. Instead of freezing the whole OEF, the AIFM can also freeze inflows and outflows related to specific assets (so-called side pocketing) that are hard to value.
Currently, the LMTs used by Luxembourg OEFs may not fully align with the requirements that come into effect on April 16, 2026. Prior to that date, fund sponsors should review and, if necessary, update the LMTs of their OEFs offered in Europe.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
