Asset managers fear consequences of reduced liquidity

Stressed outLiquidity in fixed income markets is a top concern for asset managers, according to a joint annual report from management consulting firm Oliver Wyman and financial services firm, Morgan Stanley.

The report, The Liquidity Conundrum: Shifting risks, what it means, finds that financial regulation and quantitative easing are driving huge shifts in liquidity risk from banks to the buy-side, causing concerns for asset managers and policy makers.

The research highlights a decrease in secondary market liquidity, while assets in fund structures offering daily liquidity has grown. Credit is a key area of concern, as low interest rates have pushed investors into higher yielding and less liquid assets.

“Our interviews highlight that liquidity risk in credit markets was asset managers’ top concern,” says Huw van Steenis, banks analyst at Morgan Stanley, adding that European managers are more concerned about liquidity than their American counterparts.

“Regulatory risks are rising for asset managers as policy makers increasingly worry about the risks to financial stability from US QE [quantitative easing] exit and market structure changes”, he says.

The report argues that the buy side will need to invest in additional trading, collateral management and risk management, which could mean additional costs. Tougher reforms could also mean reduced investment freedom, indirectly accelerating shifts into exchange-traded funds, which are deemed more liquid, and funds that have minimum investment periods, such as alternatives.

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