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Fund daily dealing under fresh attack as bond liquidity concerns rise 

October 18, 2016

Dave Baxter, FT Advisor

The suitability of enabling daily dealing for the vast majority of Ucits bond funds has been called into question as a report warned “fund liquidity mismatch risk” had reached its highest ever level this year.

In a Fitch Ratings report, Fund liquidity management: progress and pitfalls, authors Manuel Arrive and Alastair Sewell noted the likelihood and impact of fund liquidity mismatch risk had “increased to its highest level ever in 2016”, raising questions about bond fund requirements.

“Frequent bouts of volatility accompanied by redemption spikes and rapid falls in bond prices this year raise questions about the suitability of daily dealing offered by 90 per cent of Ucits bond funds,” they added.

“In addition, drawdowns resulting from fire sales in illiquid markets increasingly put fund capital at risk, as bond carry returns have become insufficient to offset volatility.”

While the two Fitch analysts acknowledged progress had been made in liquidity risk measurement techniques, stating these had become “more sophisticated, consistent and better documented at asset managers”, they warned that the predictive power of such tools may fall short in times of stress. Read more

 
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