Institutional investors shift strategies as market gets less liquid

More than three-fifths of respondents to a global survey by State Street and trade body the Alternative Investment Management Association said that their investment strategy had changed because of lower liquidity, with nearly a third saying the impact is significant and that they are reassessing risk management in their portfolios.

A statement from the two firms added: “More broadly, they are 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.”

Those adjustments include adding more liquid investments – with 53% of respondents saying they plan to do this – and increasing cash allocations.

Some 49% of the respondents said the role of non-bank institutions as liquidity providers will grow, with 47% saying hedge funds will play an important role in providing liquidity to the market.

Jack Inglis, CEO of Aima, said: “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.”

The decrease in liquidity – which 48% of those surveyed said was a secular shift that is here to stay – is the upshot of post-crisis regulations that mean banks have pulled back from their roles as marketmakers. That is coupled with low interest rates and slow global economic growth.

One recent test of their new role was the market turmoil after the Brexit vote. As FN reported, non-bank market makers played an important role in keeping markets trading in an orderly way.

The survey of 150 institutional asset owners, including pension funds, insurance companies, endowments and foundations, and 150 asset managers (of which 50 were hedge funds) took place in June and July. Around 35% of respondents were based in the Americas, while 40% were in Europe and 25% in Asia Pacific.

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