Risk Management in Distressed Asset Private Equity

You are an investment manager evaluating a private equity fund that specializes in distressed assets. The fund has a target internal rate of return (IRR) of 15%, and it employs a leverage ratio of 3:1 to amplify its investment potential. Recently, you analyzed the fund’s investment strategy, particularly its risk management practices regarding liquidity and market volatility.

Given the high leverage employed, there is considerable concern about the fund's vulnerability to economic downturns and liquidity issues. You must decide which risk management strategy would best mitigate these risks without significantly compromising the expected returns.