Open ended, meet liqudity

This is at least potentially a problem, yes:

Nervous investors who dump investment fund assets in a panic threaten to overwhelm a $41 trillion (£35.8 trillion) industry and push the global financial system towards collapse, the International Monetary Fund (IMF) has warned.

The IMF said open-ended investment funds, which promise consumers cash on demand, but often invest in assets like corporate bonds or property that are hard to sell quickly, had grown four-fold in value since the financial crisis.

But they also often created a so-called “liquidity mismatch” that risked overwhelming funds if lots of investors suddenly withdrew their cash in a panic.

In an extreme event where everyone turns up for their money now, as with fractional banking, then everyone’s bust. How likely is such a run? Well, it happened to Woodford, even if fairly slowly. So it’s possible, which means the concern should really be about how bad does it have to get before a run is a problem?

5% withdrawals? 50%? What?

8 thoughts on “Open ended, meet liqudity”

  1. Is the comparison with FRB really valid? Nothing is hard to sell quickly at the right price. Even property. An investment in an investment fund is worth a proportion of the underlying assets, yes? So if the fund’s obliged to sell them it gets a lousy price. And investors in the fund withdrawing from it, get a lousy pay out. Maybe very little. Caveat emptor. I can see where buyers in the markets could be picking up some remarkable bargains. But where’s the liquidity crisis?

  2. The lousy price means those exiting get a lousy price, leading to more panic and withdrawals. It’s not exactly FRB but it’s close, it’s alike.

  3. It’s the way I’ve always understood stock markets.
    The only real money was when companies raised capital by selling stock.
    All stock market valuations are nominal.
    It’s a zero sum game.

    The value of the underlying assets will be supported by buyers entering the market to pick up stock.
    The fund value falls to the point where those buyers will buy the fund rather than the assets because they’re buying the same thing at a discount.

  4. Don’t such funds usually have a delay in withdrawing, e.g. 90 days? With stiff penalties if you demand the money now?

    Having such rules in place would make it easier to avoid liquidity problems; even if it might deter some investors up-front.

  5. Hey, I’ve heard the cake shop might be going bust, I’d better redeem my cake voucher now!
    Hey, I’ve heard the supermarket are ending their cutlery set promotion, I’d better redeem my promotion vouchers now!
    Hey, I’ve heard the wedding planners have a shortage of wedding dresses, I’d better redeem my wedding dress voucher now!

    Oh, the joys of living in Hong Kong. 🙂

  6. Yet another failure of the FCA is to continue to permit open-ended funds to invest in property. An advisor put some of my money into such a fund, which promptly got gated during some sell-off. It took about 2 years to get the money out. Without the gating, I would have lost 40-50%. It was a salutary lesson to me in risk management. If you want to invest in property, do it through a REIT

  7. Diog has it right. Only a moron would invest in illiquid stuff via a unit trust/OEIC. (And I speak as a small scale investor who doesn’t know much. But that I know. I know that.)

  8. Don't CBs just print to end runs?

    BIS

    If banks do fire-sales, don’t they withdraw liquidity from their normal overnight borrowing and lending, leading to cascading effects as settlements normally put off for another day come due, but banks held fire sales so they don’t have enough to meet loan demand, and the fire sale buyers are holding on to their bargains not going out and lending them overight in repo?

    In other words, isn’t the idea that this is a zero-sum game hopelessly idealistic, which ignores how far and how long private balance sheets can remain expanded, using IOUs that are rolled among many different counterparties?

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