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Aftermath of 2008: Reactions to Decreased Liquidity 

November 21, 2016

All About Alpha

A new report from State Street Corporation and the Alternative Investment Management Association says that nearly half of the market participants surveyed believe that decreased market liquidity is a secular change, not a cyclical one: that is, that it is a climate that is here to stay, not a rain that will go away.

The underlying survey canvassed institutional asset owners, managers, and hedge funds. More than three fifths the respondents say that liquidity conditions have had an impact on their own strategies. Nearly one third rank this impact as “significant.” The changes in strategy can do in more than one direction. One quarter of the respondents said that they anticipate increasing their

The report quotes Lou Maiuri, executive vice president at State Street, saying that increased regulation and the cost-management pressures that go with it are “causing many players in the investment industry to think again about the fundamentals: what roles they play, where they invest, and how they transact their business.”

Exchange-traded funds, especially bond ETFs, have benefitted from the change in climate, because investors are attracted by their marriage of liquidity and yield. Some observers, though, are wary of ETFs, fearing as the report puts it “a disorderly market environment if investors decide to reduce their exposure en masse.” Read more

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