Helping Manage Liquidity Risks During Large-Scale Fund Redemption Requests
“The Financial Conduct Authority (FCA), has criticised asset managers for their lack of coherent plans to cope with large-scale redemptions, which could potentially harm investors. The FCA conducted a survey of liquidity at 14 asset managers, including authorised fund managers and investment and portfolio managers. The survey revealed that many asset managers’ plans to cover large-scale redemptions were inadequate and did not appropriately consider liquidity risks. Stephen Cork, managing partner of Cork Gully said, ‘we can offer solutions to both the fund manager and investors through our suite of services, specifically through the secondaries market and the accelerated sale of portfolio assets to help manage these risks’.
The FCA’s warning comes at a time of growing global concern about risks in the funds industry. Volatile markets, high interest rates, and slowing economic growth could trigger significant redemptions, leading to market instability. To address these risks, the FCA has urged asset management companies to take action and cover gaps in their liquidity management processes, particularly during times of stress.
The survey found that many asset managers used assumptions that were not conservative enough when testing the liquidity of their portfolios. Additionally, they did not adequately consider how easily they could sell off portions of their entire portfolio. While some funds had arrangements in place to meet large one-off redemptions, they lacked sufficient plans to handle cumulative or market wide redemptions, which could have a significant impact on the fund.
According to Stephen Cork, senior management frequently neglects the impact of reputational risks, evident in cases like the collapse of Odey Asset Management. Cork Gully, can offer assistance in executing a structured and transparent divestment strategy to help return investors’ capital in these situations. Stephen Cork also points out that the market tends to overlook crisis events such as the collapse of Neil Woodford’s funds, leading to missed opportunities for learning. Cork Gully take measures to manage liquidity calls in an organized fashion and can represent either investors or managers in this process.
The FCA’s concerns about liquidity management are not unwarranted, as previous market examples have demonstrated the real impact of liquidity risk on investors.
To address these issues, the FCA wants asset management firms to improve the oversight of liquidity management risks. This includes ensuring clear accountability for managing these risks and having individuals with sufficient expertise in charge. They also recommend improving liquidity management tools and stress testing processes.
In light of the survey’s findings, the FCA is encouraging all asset managers to take these risks seriously and implement necessary changes to avoid leaving their investors exposed to potential harm.