2.Who are the fund’s investors?
Are your investors institutional or retail? Retail investors are likely to be less experienced and more prone to herd behaviour in the event that fund performance is low. They’ll often have a need and desire to turn investments into cash very quickly compared to institutional investors. The need for investors to turn their investments into cash may not match with how quickly the asset can be sold.
What’s more, retail investments can only be invested in UCITS funds which should have a certain amount of liquidity. This is compared to a hedge fund, with longer intervals between when a fund can be bought into or sold.
It’s worth reiterating that institutional investors in a retail fund do have the power to quickly withdraw their investments, even though they’re large. For example, a local authority making the decision to withdraw its £263m pension fund.
3. How will you shift the fund’s assets?
Have a plan in place for how you would sell off assets to meet demand if needed. You must consider the liquidity of the stock in your funds, and when and how investors might want to redeem.
Redemption gates are allowed under the rules but do not provide great customer outcomes even when disclosed in advance. Active liquidity management is always a better tool.
As funds grow, the percentage of illiquid assets grows cumulatively. The greater volume of illiquid assets in the fund the more difficult it will be to get rid of the illiquid assets. Therefore firms will have to amend their holdings or hold more cash.
Take the opportunity
None of these points should come as a surprise, and yet scenarios like this are currently playing out in the real world. Take this opportunity to make sure these risks are managed in your own firm, developing frameworks to protect your future.
The governance of the liquidity management process and the involvement of risk management teams is absolutely crucial in moments of stress. You should also make a point of disclosing to investors the liquidity management tools they have available to use.
Fortunately we can be on hand to help you create liquidity risk management solutions that are ideally tailored to your business. We have practical experience in this area as well as a deep appreciation of the rules.
Find out just how we can help by speaking to an expert today.