The Trouble with Liquidity
|Nov 28th, 2011 | Filed under: Alpha Strategies, Hedge Fund Industry Trends, Hedge Fund Strategies, Institutional Investing, Today's Post | By: bswarup||
Liquidity has become a virtue of late.
Hedge funds fill their monthly letters and conference calls with details of how quickly they can liquidate their portfolios within increasingly shorter timescales. Many managers now have strict stated limits on their ability to take so-called illiquid investments. Investors are focusing more on liquidity throughout their due diligence and the flow of funds to ‘liquid’ strategies reflects their growing domination. The number of funds offering monthly, weekly, daily liquidity multiplies by the day in response. And regulators actively champion this hunt for liquidity as an aspiration for the financial community.
That is frightening. Though a virtue in moderation, liquidity rapidly becomes a vice in excess.
On the surface, the reasons for this paradigm shift are easy to fathom. Investors – be they direct (like funds) or removed (institutional investors) – increasingly want the ability to recover their money at short notice, particularly if there are any unexpected downturns. There is a growing appreciation that to get to the long-term return, one has to navigate successfully through the short-term and for most, that means having ample liquidity in your portfolio. Many are also still nursing painful memories of 2008 and the sudden inability to realise their investments. Like religion and politics, gates and side-pockets have become sensitive topics best avoided in polite company today. More…
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Dr Bob Swarup oversees alternatives, thought leadership and risk management at Pension Corporation, a leading player in the pension buyout space. He sits on the Advisory Board at Adveq, a leading European private equity fund of funds, and is a member of the CAIA Exam Council. Bob has written extensively on diverse topics across the financial spectrum, most recently working with Bloomsbury Publishing to put together QFINANCE - a book of essays on all aspects of global finance by leading academics, policymakers and practitioners across the world. He is currently a Visiting Fellow at the London School of Economics and is writing a book on financial crises to be published by Bloomsbury in 2012.