Arkus Article: The need for effective fund liquidity management
Recently, Mark Carney, Governor of the Bank of England, said that “investment funds have a structural mismatch between the frequency with which they offer redemptions and the time it would take them to liquidate their assets, magnifying market adjustments and triggering further redemptions”. He was, of course, speaking in the context of the suspension of the Woodford Equity Income Fund following a period of increasing redemption levels. While this may not apply to all funds all of the time, liquidity issues can, indeed, affect any fund at any time! The problem with liquidity is that it isn’t a problem until suddenly it is a problem.
Maintaining adequate fund liquidity isn’t a new requirement—the FCA requires that “in stressed market conditions fund managers must continue to meet redemption obligations and other liabilities and remain suitable for their specific investor base” (FCA, Liquidity management for investment firms: good practice, 2016). However, producing and monitoring daily fund liquidity exposures can be a time-consuming task, let alone analysing the impact of both stressed asset liquidity and stressed redemption levels. Fortunately, at Arkus, we have a cost-effective liquidity risk management reporting and management solution already implemented in our RiskRadar system. This is backed up by a dedicated team of risk experts who work to ensure that our clients are able to produce the independent daily liquidity stress testing that they need both to meet regulatory requirements and to reassure clients.
FCA. (2016). Liquidity management for investment firms: good practice. [online] Available at: https://www.fca.org.uk/publications/documents/liquidity-management-investment-firms-good-practice [Accessed 18 Jun. 2019].