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As we’re currently seeing in the roiling high-yield market, packaging illiquid investments such as distressed bonds into liquid mutual funds doesn’t change the fact that the underlying investments are illiquid.

Being able to readily buy and sell ownership stakes in illiquid investments may give the illusion of liquidity, but as investors in the troubled Third Avenue Focused Credit Fund recently discovered—after being informed by the fund’s manager that they may have to wait weeks or months to get their money as the fund winds down—the reality of the mismatch becomes painfully evident in a crisis.

Investors have become accustomed to and crave liquidity, which is the ability to buy and sell investments at prices reasonably close to those of the last transaction. The depth and liquidity of American’s equity markets make them the reason so many international investors flock here.

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