Survey: New Environment Makes Liquidity Management Top Priority for Fund Managers

Nov 16 2016 | 10:19pm ET

Alternative asset managers believe liquidity management is a top priority given a secular shift in the markets, according to a new survey from AIMA and State Street.
 
Furthermore, more than half of the managers surveyed for the report believe decreased market liquidity is here to stay. Regulations stemming from the 2008 financial crisis, coupled with historically low interest rates and slow rates of growth in the global economy, have constrained the ability of many banks to perform their traditional roles as market makers, which in turn has impacted broader market liquidity conditions, the report said.
 
More than three-fifths of the survey respondents said current market liquidity conditions have impacted their investment management strategy, with nearly a third rating this impact as significant. 
 
As a result, they are reassessing how they manage risk in their investment portfolios, adjusting to an environment of less liquidity in which trading roles have been transformed, new market entrants are emerging, and electronic platforms and peer-to-peer lending are changing the way firms transact their business.
 
While there is no one-size-fits all strategy for balancing risk and return in the current market environment, investors and managers are adapting to the new environment by focusing their efforts in three areas: 
 
1) Rationalizing the risk: The liquidity shift has serious ramifications for investors globally, including improving the way they measure and report on liquidity risk, and reassessing how they manage risk in their investment portfolios.
  • 42% of all respondents say the changed market conditions are making it more challenging than before to report their liquidity position to their board or regulators
  • 44% of respondents plan to invest to improve their risk –reporting capabilities.
 
2) Optimizing the portfolio: Investors and managers are shifting their allocation strategies to take account of new liquidity conditions. While more liquid fund vehicles such as ETFs, UCITS funds and 40 Act funds have been gaining ground, a holistic strategy that balances risk with return across the whole portfolio is critical.

  • 53% of asset managers and asset owners are planning to add more liquid investments to maintain exposures
  • 44% are increasing the size of their cash allocation against future liabilities or redemptions
 
3. New rules, new tools: New market liquidity conditions are inspiring many players in the investment industry to invest in solutions and platforms, such as peer-to-peer lending, that provide alternative sources of liquidity. 
49% say the role of non-bank institutions as liquidity providers will grow and 42% say that this growth will come from hedge funds
47% say hedge funds may play an important role in providing liquidity in more volatile markets
 
State Street commissioned Longitude Research to conduct the survey, which included 300 institutional asset owners and managers in June and July 2016. Of this number, 150 were asset owners, including pension funds, insurance companies and endowments and foundations, and 150 were asset managers including 50 hedge funds. 
 
Respondents represented 14 countries worldwide, with approximately 35 percent of respondents were based in the Americas, 40 percent in Europe and 25 percent in Asia Pacific.
 
“Increased regulation and the pressure to manage costs have significantly changed market liquidity conditions,” said Lou Maiuri, executive vice president and head of State Street’s Global Exchange and Global Markets businesses. “The new liquidity paradigm is causing many players in the investment industry to think again about the fundamentals: what roles they play, where they invest, and how they transact their business.”
  
“With liquidity likely to remain top of mind for years to come, now is the time to find the strategies, tools, and solutions that will make a sustainable difference in the new investment climate,” continued Maiuri.
 
“Hedge funds and other asset managers are responding to more challenging market liquidity conditions by increasingly seeking out new opportunities, including taking on a more prominent role as market-makers, providing new sources of finance to the real economy, and lending their support and expertise to improving liquidity risk management,” added AIMA CEO Jack Inglis.
 
AIMA is a global alternative investment industry association with 1,700+ corporate members in more than 50 countries. It is the co-founder of the well-known Chartered Alternative Investment Analyst designation, and its manager members collectively manage more than $1.5 trillion in assets worldwide.

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